3 greatest financial advisors challenges according to McKinsey
McKinsey and PriceMetrix’s recent study (June 4, 2020), The state of North American retail wealth management provides some interesting and timely insights into what’s happened over the past five years and the resulting challenges ahead.
Challenge 1: Advisors have relied on the markets and asset-based fees to grow
Since 2015 advisor’s average annual revenue growth was 5%, largely due to market growth and an increase in fee-based.
This approach to growth, relying on the markets, isn’t sustainable. When markets are down so is revenue, which we’ve seen play out over the first half of 2020.
In a recent article, I explored the importance of tracking revenue growth net market growth to understand how you’re business is doing. There are three drivers of growth:
New client assets
Existing client assets
Increases in efficiency and productivity
Aligning your resources and consistently focusing on even one of these drivers will lead to growth over time.
Challenge 2: Clients are more likely to switch advisors during a market downturn
According to McKinsey’s The Anatomy of Outperformers, in 2009, 10% of clients left their advisor, the highest level of the last 12 years. Moreover, advisors who focus on adding new clients outperform their peers during market downturns.
The key takeaway, if you aren’t intentionally looking to add new clients during normal markets you already at a disadvantage. Starting to prospect during a downturn isn’t ideal. When markets get challenging your focus needs to be on clients.
Knowing that clients are more apt to leave during downturns the best thing you can do to retain relationships and assets is to increase proactive communications, check-in with clients’ to understand how they are feeling, and provide resources and support that address those fears.
Ask, listen and reiterate to show them they are heard.
As client experience expert, Julia Littlechild recommends, especially during challenging times it’s critical to understand client sentiment and lead with those insights. In her work, she has found that 72% of engaged clients say being asked for their input is important.
Retaining and deepening relationships requires engagement.
Systematically check-in during difficult times and ask for input during normal times. Use those insights to drive changes in your business and communications to increase trust and retention.
Challenge 3: Fees have seen a decline over time and bear markets increase downward fee pressure
According to PriceMetrix, during and following the 2008 financial crisis, 17% of advisors increased their level of discounting (priced lower), and while their price levels increased after the recovery, they stabilized at a rate halfway between pre-crisis levels and the bottom of their pricing (that is, they only recovered half of what they gave up).
Since 2015, fees have decreased and have remained relatively flat since 2017.
The lesson from 2008, don’t reduce your fees. You provide a service that’s valuable and reducing fees to keep or attract assets isn’t scalable and ultimately hurts your overall revenue.
If you are charging less than 1% on $1mm of assets or less then you may be underpriced.
To attract the right clients and provide a high level of service focus on quality over quantity. The McKinsey study also found that top advisors (in terms of client retention) have deeper relationships and fewer client relationships.
As you look to the future, protect your business by having multiple and stable revenue sources.
Establishing a minimum annual fee is one way to protect and stabilize revenue. Especially if you’re doing planning work, having an annual minimal fee may make sense. Depending on your client demographic and the complexity of work they require a minimum of $1,000 to $10,000 (or more) a year may make sense. Another idea, if you have or are looking to add younger clients, with less complex planning needs, consider charging only an annual fee under a certain asset level. Consider breaking it into monthly payments to make it more accessible.
This study provides timely insights into what's happened and happening in the industry. After years of strong market growth, the first quarter of 2020 has been a wake-up call for advisors and investors. As you look to grow in the future consider the lessons from the past.
To learn more, access the entire McKinsey study.
