5 Truths About the Pricing Revolution in Wealth Management

In March, Schwab issued a salvo that I see as the start of a pricing revolution in wealth management. The industry has been talking about fee compression for a long time, but advisors and firms have held on to the AUM pricing model — which frankly doesn't make much sense to me given today's technology and the next generation of investors.

While I'm not sure that Schwab's new subscription model will be the best solution for everyone, I do think that we will look back at this announcement as the start of pricing innovation for advice and investing that will ultimately benefit consumers and change how advisors think about their businesses.

My point of view is based on five convictions:

1. AUM pricing has some unfair consequences.

The uncomfortable truth is pricing based on assets under management creates barriers to entry for people who need non-investment advice and can lead to overcharging people who have a lot of assets but need less planning.

Thirty years ago, AUM pricing made sense as the cost of manufacturing or managing a portfolio of securities, at a time when everything from research to trading was manual. As functions were automated, advisory firms expanded with holistic planning, allocating the AUM-based price to these new activities.

If a person needed advice, but didn't meet the minimum asset threshold, there was no way to serve them profitably. Conversely, high-asset clients whose planning needs were largely satisfied continued to pay fees based on AUM, often subsidizing other unprofitable clients.

2. Today's investors deserve to know what they are paying for.

Older, traditional clients may be happy with their personal relationships or too reluctant to ask, but Generation X and younger investors are accustomed to price transparency and choice. Schwab's subscription model mirrors the way many services are now priced and delivered, from cable TV, to gym memberships. Comparison shopping — looking at features, benefits, price and peer reviews — is the norm.

So, if a young investor understands money management is available for 30 basis points, and you are charging 1.25%, they are going to want to know exactly what is being delivered for the extra expense.

Unfortunately, "planning and advice" are unspecific terms — along with a new pricing model, I expect we will see much more granularity about what people get for their money.

3. Advisors will find a new way to make a good living.

Some of the fear about a new pricing model is the impact on advisors and their firms — and that's understandable. Several advisors have confided to me their fears that consumers won't be willing to pay discrete advice fees, which could destroy the profession. The truth is, it may weed out some advisors, but I know plenty of great advisors who will prosper.

As one super-successful millennial I know expressed, "I'm smart and I make great money. Why would I want to take advice from someone who isn't confident enough to charge me what they are worth?"

It may be a tricky transition, but I foresee a day when advisors will be like lawyers, accountants and other professionals who have earned a certain hourly rate and know how to apply their time to maximize both client success and their earning potential.

4. Firms will rethink their pricing paradigm or risk extinction.

Notice I use the word "rethink" — we are far from having a clear answer about this evolution, and I don't expect a one-size-fits all solution. That said, Schwab will put marketing money behind its new idea, and others will likely follow its path.

The AUM pricing model has been sustained by a lack of transparency and an unspoken agreement by the industry to keep the status quo. That is over. Investment management fees have already been reset lower, and now advice fees will be demystified.

Future-focused firms and advisors should already be strategizing about how they can transform their pricing models to remain both profitable and competitive.

5. Technology's importance will shift from the front to the back office.

Consumers expect a great digital experience, so whether a firm is an online or traditional advisor, there's been a lot of progress in front-office technology. As important as that is, moving from AUM pricing presents a real profitability challenge unless the underlying systems, processes and cost structure are radically changed.

Technology needs to take a larger role in the execution of investing, planning, relationship management, servicing and everything else. Going deeper, firms need to eliminate manual and paper-based processes and think in terms of tenfold scale, not incremental efficiency.

I've seen how this works firsthand; we need to rip out and replace the legacy systems and high-friction, costly practices in our industry or flexible, consumer-friendly pricing will not be feasible.

The pricing revolution will help our industry finally wake up to the real importance of digital transformation. Slick front-end features are not enough — the shift from AUM pricing will make speed, flexibility and exponential cost efficiency paramount to firms that want to succeed in the next wave of wealth management.

Technology will be what enables advisors to maximize their time with clients and their incomes, while consumers will get the value and choice they want and deserve. A new pricing paradigm for our industry has been inevitable, and now the time has come for us to figure it out.

– Ed. Note: William Capuzzi is CEO of Apex Clearing. Schwab also provides clearing services.

— Check out A Digital Wake-Up Call for Wealth Management on ThinkAdvisor.

William Capuzzi is CEO of Apex Clearing.