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Best Practices of Top Advisors

Who's faring the best with their advisory business plan--and how are they doing it?

Morningstar, 01/11/2013

Pricing services and targeting the most profitable clients are ongoing challenges for any business, but doing so amid a volatile market and a big industry shift in pricing models has made the task even more challenging for financial advisors.

To get some insight on who's faring the best with their advisory business plan--and how they're doing it--we sent some questions over to Pat Kennedy, Vice President of Product and Client Services for PriceMetrix, and his team. Based in Toronto, PriceMetrix directly measures aggregated data on millions of investors, transactions, and fee-based and transactional accounts representing over $3.5 trillion in investment assets. It crunches the data and pulls out insights to help wealth-management firms grow revenue and profits--and it also publishes some insightful reports on the retail wealth management industry.

1. Your research discovered that the outperformers raised their prices and opened more accounts while the comparison group (those in the bottom quartile), lowered their prices but still struggled to add more business. This seems contrary to basic economics. What's behind the willingness of the outperformers' customers to pay more, even amid a tough market environment? Can you point to any specific pricing strategies that tend to characterize the outperformers?

On the surface, it does seem to contravene the principles of economics that a higher price could create higher demand. But at the core, different investment advisors are not offering the same product. There are premium, basic, and discount services.

In our experience, advisors who are able to charge a premium have a well-defined and differentiated value proposition, which is communicated and demonstrated regularly to the client. They are confident that their price, while it may be at a premium, is competitively fair and reflective of the value they deliver. They are willing to discuss pricing openly with clients and are more likely to say no to a prospect because of a poor fit with their proposition or an unwillingness to pay.

Essentially it is the investors' perceived value of the service that the outperformer is providing that warrants the premium price/fees.

We also found that outperformers are more likely to have a pricing strategy and policy--for example, tying their pricing to a household segment. A pricing policy leads to price integrity, which is one of the most important and often overlooked attributes of effective pricing.

2. In your studies, you talk about something called 'sympathy pricing'; what is that?

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