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We Told You So

The assets-under-management pricing scheme needs to be replaced.  

David J. Drucker, 07/23/2009

Since the fall of 2008 and the U.S. economic meltdown, advisors have lost hundreds of thousands of dollars in revenues that they didn't have to lose.

Consider this analogy ... you walk into a swanky restaurant ready for the full fine-dining experience, and this restaurant can deliver. It's beautifully appointed, creates an impressive yet comfortable ambiance, and features the finest gourmet delights on its menu.

What's strange, though, is the pricing. Along with your entree comes the standard steamed vegetable medley and the price of your entire experience is based on the daily price of one of its ingredients: asparagus. If asparagus is running, say, $3.60 a pound, the restaurant multiples that by 10 and charges you $36 for your dinner.

Now let's further suppose that asparagus is a vegetable that becomes gradually more costly to grow over time so, while--like most commodities--it fluctuates in value, it also enjoys a rising long-term price trend. This is perfect for the restaurant because the prices of its meals then rise, on average, to help cover inflation's effects on the restaurant's overall cost structure.

All is well until, one day, the bottom falls out of the asparagus market. Prices decline almost overnight by 30%-40%, and the restaurant takes a huge hit to its top line. Customers have become accustomed to the restaurant's pricing strategy and are now enjoying the fine-dining experience at a much lower price, causing consternation and downright financial havoc for the restaurant.

Sounds a bit silly, right? This could never happen. A restaurant would never price its meals this way, right?

And yet, financial advisors do it every day. Granted, the analogy isn't perfect but it's enough so to make the point: advisors sell the financial management experience based upon the value of one important-but-partial piece of that entire experience.

The typical independent advisor today offers an experience [see The Experience Economy: Work Is Theater & Every Business a Stage by B. Joseph Pine and James H. Filmgoer, in which he takes good care of his client financially and otherwise. The experience he sells incorporates hand-holding, analysis, friendship, investment management, social opportunity, financial planning, and the exploration of life values, goals, and dreams. What today's independent advisor offers is the financial equivalent of the fine-dining experience.

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