Advising The Business Market

The Value Of Personal Advice: Wealth Management Through The Pandemic

Following a difficult year, advisors achieve record client and asset retention

The 10th annual PriceMetrix report examines an unprecedented year for North American wealth management. Reprinted with permission. Access the full report here.

In 2020, North American wealth-management clients dealt with fear and uncertainty in their portfolios, amid the fear and uncertainty that defined so many other parts of their lives due to the human tragedy of the COVID-19 pandemic. Relationships between financial advisors and their clients were put to the test, and the value of advisor-to-client advice was on full display as advisors achieved record client and asset retention.

However, the road ahead is uncertain. Total asset growth continues to be market dependent as new client additions have stagnated. In addition, revenue growth has not kept pace with asset growth. Demographic changes are having an impact on client composition at an unprecedented rate, and client perception of value for advice remains under a microscope. That, along with the growing prevalence of low-cost hybrid advice models, continues to put downward pressure on pricing.

Highlights for 2020 include the following:

  • Continued asset and revenue growth per advisor, driven by market performance
  • Record-high client retention, but commensurate stagnant performance in the number of new client additions
  • Continued growth in fee-based revenues, offset by continued decline in fee pricing
  • A resurgence in trading activity putting pressure on per-transaction fees
  • Growing complexity in how clients pay—with increased use of multiple products within the same household relationship

It’s Been a Year of Remarkable Resiliency for the Markets and for Advisors

Median assets per advisor grew to a record high of $130 million, up 9 percent over 2019, though three-quarters of this increase was driven by market performance. Revenues per advisor also saw record levels but didn’t enjoy proportionate growth to assets, increasing only 1 percent year over year. Median revenues per advisor now stand at $724,000, up from $718,000 in 2019.

More Money in Motion? Wait for it …

The period that followed the market crash of 2008 saw a spike in client attrition. There were winners and losers during this period of increased money in motion, as some advisors opportunistically pursued new clients who were in search of better advice. So far, the economic impact of the COVID-19 pandemic has not had the same effect. In 2020, advisors opened 7.4 new client relationships, a modest decline from 2018’s high of 8.1.

Advisors have seen only modest growth from new client relationships, but the clients that have been acquired during this period had greater assets. In 2020, the average assets per new client reached an all-time high, growing steadily from $705,000 in 2016 to $905,000 in 2020.

The Fountain of Growth: Next-Generation Wealth

Recent market performance explains 75 percent of asset growth for advisors. Taking market performance out of the equation, the 7.9 percent annual growth that advisors have seen since 2015 looks more like 2.0 percent. While inertia in adding new clients plays a role in this stagnant growth, so does the changing client demographics.

An aging client base puts tremendous pressure on the growth rate of advisors themselves. Older clients are not only more conservatively invested but also less likely to adopt fee products (which previous PriceMetrix research has shown is a key driver of growth), and they are more likely to be net drawers from their account rather than net contributors. All these factors add up and affect growth.

Advisors have seen only modest growth from new client relationships, but the clients that have been acquired during this period had greater assets. In 2020, the average assets per new client reached an all-time high, growing steadily from $705,000 in 2016 to $905,000 in 2020...

Think of every client as a “cell” that makes up the whole of an advisor’s practice. Some grow quickly, some grow slowly, and some shrink over time. The resulting whole grows very differently based on the cellular makeup. The goal for advisors should not be to serve younger clients exclusively (as older clients will tend to have larger portfolios) but rather to pursue a balance of younger and older clients, just like a well-diversified investment portfolio.

The drop in the average age of new relationships is evidence that advisors are choosing to work with a greater number of younger clients, an accelerant to the overall change in client-demographic composition. Average new-client age dropped from 57.5 in 2019 to 56.4 in 2020, the largest single-year decline.

Trading is Up—but Pricing is Not

One thing that 2020 brought about was a resurgence in equity-trading activity. After a long period of decline, equity trades per advisor rose 19 percent (from 161 in 2019 to 192 in 2020), as clients and advisors looked to take advantage of volatility in the market and rebalance portfolios.

This increase in activity, though, was offset by a continued decline in pricing. For transactional accounts, the average amount charged per trade (as a percentage of list price) dropped from 53 percent in 2019 to 48 percent in 2020. Advisors now charge less than half of the list price. An increase in trade size is responsible for some of the increased discounting, as larger trades are more likely to attract discounts. (Average trade size has increased steadily, up from $16,200 in 2016 to $19,600 in 2020.) But the larger influences are likely, first, a lack of attention paid to transaction business (with advisors increasingly moving to asset-based fees) and, second, accelerating price pressure from the discount brokerage “race to zero” commission trading model.

Relationship Pricing: The Next Frontier

As wealth-management relationships grow in complexity, so does pricing. An emerging trend affecting price dynamics is the proliferation of “hybrid households.” Clearly, more clients and advisors are choosing fee-based accounts. However, 41 percent of households remain transactional only, and 34 percent of households have both fee-based and transactional accounts—hence the term “hybrid.” Affluent clients are even more likely to be hybrid, with 61 percent of households with $2 million or more in assets holding both account types.

There are several reasons why clients may have multiple account types. In some cases, certain products or investments can’t be held in specific fee-based account types. Often, though, clients who are transitioning from transaction-based accounts to fee-based ones may only transition assets that are more actively traded, as a means to keep overall household fees lower.

Whether a cause or effect of an increasingly complex pricing world, the changing dynamics of product use presents a serious challenge to advisors and firms. Most firms continue to set and manage pricing policies within product lines, but those lines are clearly blurring. Advisors need tools and policies that help them consider the entire relationship when determining and communicating price with clients.

Opportunities Abound in the Wealth-Management Industry

For the North American wealth-management industry, the winds of change are picking up speed, with increased competition, unpredictable markets, and the pace of demographic change accelerating. Growth is likely to be more elusive than in the past ten years and more heavily influenced by the decisions and actions of advisors themselves, not just broad market returns. As challenging as 2020 was, it has served as a clear reminder of the importance and value of advisor-to-client wealth-management advice and elevated the role that many advisors play in their clients’ financial lives.