How Advisors Can Inoculate Themselves from Fee Compression
In our last post, we highlighted four critical issues financial advisors face in the aftermath of the COVID pandemic, impacting the way they approach their businesses and the way clients are responding. In the next month or so, we will take a deeper dive into these issues, the challenges they present, and how advisors can meet them head-on for a greater chance at success.
At the top of the list—an issue familiar to all and well-covered here in past blog posts—is fee compression. We’ve discussed the issues of fees at length—how to justify them, how to talk about them with clients, and how to avoid the race to the bottom of fees and expenses. But the issue appears to be accelerating, putting even more pressure on advisors to reduce fees.
Yes, you should be expounding on all the reasons why your value is significant because it is. But clients are also coming under pressure through an all-out marketing effort by investment firms, mutual fund groups, and robo-advisors to pay as little as possible for investment advice. It’s hard to compete with the constant drumbeat of rock-bottom fees, making clients feel foolish for paying one dollar more than they need to for “quality” advice.
Don’t forget the other side of the fee compression equation
While it’s a fact that competition from new entrants in the advice field and the mass migration of investors to passive funds have driven fees down, it’s also true that fees have tumbled lower due to increased advisor productivity and scale brought about largely by technology. Advisors can charge less because they’re making more profits on their revenue. If you’re not focused on strategies for operating more profitably, you could soon be out of the game.
Consider some of the strategies successful advisors are employing to improve productivity in a low fee environment:
#1. Building scale
Achieving greater efficiencies by building scale is a time-tested way to improve productivity. Look where you can improve internal capabilities through enhanced technology, from onboarding clients to personalized communications, to partnering with fintech firms for portfolio management and financial planning. Consider partnering with a firm or colleague who can open new markets for you. Outsourcing non-essential functions is another way to free up time to devote to business development.
#2. Narrow your focus and specialize
Remember, you can’t be all things to all people. Make yourself known as a specialist in an area people are looking for authentic advice, such as retirement income planning or college financing, or hold yourself out as an investment coach who helps people overcome their emotions and biases in investing. Advisors who become niche specialists, developing the expertise to serve a well-defined clientele, spend less time marketing because they become more referable within that niche.
#3. Increase your authority and visibility
Clients want to do business with people who are respected in their industry and community. You can inoculate yourself from fee compression by increasing your visibility and authority as a thought leader. Publish a blog. Get yourself published on other blogs. Deliver a weekly podcast on issues of concern to your clients. Join the board of directors of a community organization. Write a book (or have it ghost-authored) and build a seminar series around it. Becoming a thought leader doesn’t happen overnight, but the journey alone can be extremely rewarding.
When you focus on strategies to improve your productivity, you enhance your clients’ experience regardless of how much they are paying. Instead of having to justify your fees to your clients, they will recognize value when they see it.
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