In an increasingly competitive environment for financial advisors, from the rise of robo-advisors and Vanguard Personal Advisor Services, there are more pressures than ever on us to justify our cost to clients. Leading many financial advisors to question whether it’s time to cut AUM fees – or even abandon the AUM model altogether.
Clearly, for advisors who are far more expensive than their competition, cutting fees to at least be “reasonably competitive” may be inevitable. But for those whose AUM fees are already reasonable, beware the strategy of trying to attract clients by being the lowest cost financial advisor. Because ultimately, that may attract the most cost-conscious and price-sensitive clients – who may come to you for being the lowest cost, but will just as quickly leave you for another advisors who is just a basis point or few lower… because that’s the behavior of clients who seek out the lowest cost solutions!
More generally, though, the real challenge of trying to compete by being the lowest cost provider is that it sets the focus to competing on price, instead of competing on value instead. In fact, for financial advisors who find their prospective clients challenge their pricing, usually the biggest issue is not their pricing at all – it’s a lack of differentiation, and the perception from clients that your services are no different than any other financial advisor… which means price is the only comparison left.
In other words, most “price” conversation are actually value and differentiation (or lack thereof) conversations. Which means the real solution is not to adjust your prices – or change your entire business model (e.g., from AUM fees to retainer fees) – but instead to try to improve your differentiation by focusing on a niche or specialization, such that clients will focus on your unique value instead of comparing you to others on price alone! Because for advisors who are truly differentiated with a unique value, clients don’t often ask very many questions about price and cost in the first place – because there’s nothing to compare you to anyway!