Wrecking the Curve

Inside the industry there are a fair amount of studies done to show what the average Registered Investment Advisory firm looks like. What is average revenue, revenue per client, fees for a $1M portfolio, advisor compensation, staff compensation, software costs, compliance costs, office costs, etc. Some of these get into product/investment selection, average asset allocation, use of alternative investments, use of individual stocks and bonds, etc. Some are technology focused, who is using what software for contact management, financial planning, billing and performance reporting.

It’s always struck me as a little odd and somewhat distracting to be so concerned with what our “peers” are doing with their businesses. Why would knowing how the average firm recommends allocating to alternatives have any influence on my decision to do so? Or how much they recommend clients invest internationally? Are we not capable of arriving at thoughtful conclusions about these considerations on our own? Are we so scared to step out of line?

Of course one of my biggest issues with these studies is the fee structure naval gazing. Many advisors seem fixated on these industry figures. What are you charging on the first $1M? The next $2M? How big of a “break” in fees do you give your biggest clients (this really means how much more are you charging them, but I digress). What I find most frustrating about everyone sharing these figures is that no one is doing it to become more competitive. Instead, looking at industry average fee structures is an exercise in quiet collusion. The answer so many seek is not “How can I price more competitively to attract business?” as it would be in so many other industries. Instead it is “Can I be reasonably sure that I can get away with my fee structure because everyone else is too?”

For a very long time now, this has been wildly effective. Very, very few firms have stepped out of line. A few who have done so have either flown completely under the radar (here’s to you, Steve Evanson and crew) or gone the other direction and built something truly large and recognized (what used to be Portfolio Solutions). But the average local small to mid size firm, and even most large firms, knew all that they had to do was not step out of line and they could continue to collect enormous margins.

I think about these shared-information studies as an exercise akin to having a high school teacher who graded on a curve. If nobody tried too hard, studied too much, everyone else in the class could get a boost from shared laziness. If the class could just convince the teacher that the exam was too hard for anyone to score of 80%, suddenly my C+ could be an A-! Just a little soft collusion among the group is all it took.

I know people get sick of me writing and talking about fees in the industry. But I gotta tell you, I’m trying to wreck the curve. I’m not too concerned about RIAs running 70% profit margins suffering because somebody finally looked at these studies and thought “This is completely bonkers” and decided to rethink what is reasonable compensation for services. It’s time for this industry to decide to become a profession, to stop justifying a fee structure that looks like a “take what they can afford” and more straightforward thinking about how we should earn a living. We aren’t the IRS and we aren’t entitled to some share of clients’ portfolios just because they asked for our help investing their hard earned savings. Great financial professionals do good work, add value to client relationships and become a trusted part of their clients lives. But we can do those things, and do them well, with compensation that doesn’t depend on large relationships subsidizing unprofitable relationships. Compensation that is tied to services provided, not the number of digits left of the decimal in our spreadsheets. Compensation that puts us in line with how individuals and families pay for other valuable services from their accountants, attorneys and more. It’s time to wreck the curve forever.

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