Have you ever noticed that products you buy repeatedly—paper towels, toothpaste, running shoes, etc.—often start out great, but over time, the high quality that you liked so much starts to decline? My theory is that businesses, especially big businesses, are under constant pressure to increase profitability; an easy way to do that is to reduce costs.
Then, an executive (or consultant) who's been charged with finding ways to cut costs comes back and says: "We spend a lot on this (ingredient, process, or design), but we could save (a large amount here) without affecting the quality." And upper management is inclined to believe them, regardless of the reality of the situation.
In my work with independent advisory businesses—especially larger firms with annual revenues of $1 billion or more—I've noticed a similar pattern. It seems to be getting worse in this time of declining profits.
As I've written recently, over the past couple of years, many large firms have been experiencing falling profitability because they tend to throw money at problems, and then double down when that doesn't work, instead of taking the time to find the right solution—usually at a much lower cost. But these days, this problem has become larger, due to the (perceived) downward pressure on AUM fees created by many factors, including robo-advisor digital advice platforms.
Now, I haven't seen much evidence of major, across-the-board cuts in AUM fees. I am not seeing the issue with my advisory firm consulting clients. But I am hearing from many other advisory firms that both clients and prospective clients in much larger numbers are asking about advisory fees these days. And if people are asking more often, it's very likely that at least some of those discussions are resulting in lower fees. The few businesses that have already been affected tend to be larger advisory firms.
That's because the larger firms tend to have a much harder time articulating their value proposition, so their clients tend be more confused about why they are paying what they are paying. There are a number of reasons for this, but here are a few of the key pricing issues that larger firms face:
1) They do much more.
Not only do larger advisory firms tend to have many more clients than smaller firms, but those clients tend to be wealthier, with a broader range of financial needs. It's often hard for people who work in these firms to get their brains around all the things that their firm does for clients.2) They have many more clients with differing needs.
In smaller advisory firms, most of the clients have the same needs, and therefore get the same services. But the clients at larger firms not only tend to have more needs, they tend to have differing combinations of needs. That means the value proposition for one client will usually be very different than the proposition for another client. Which means that each value proposition has to be tailor-made for each client.3) They often have different fee structures for different levels of service.
That means, of course, that each value proposition has to tweaked to include exactly what each client is paying for, and why.4) They have more people doing different things.
Most large firms have gotten so large that many of their employees don't have any idea who does what and why in other areas of the business. So the normally effective strategy—of making sure that everyone in a firm can recite its value proposition when asked—is hard to implement and maintain in larger firms.
Finally, to make matters worse, most large firm owners tend to be concerned that sooner or later these more frequent discussions about fees actually will result in lower fees, and they are already taking steps to address that eventual problem—by cutting costs.
