Unprecedented market volatility and economic uncertainty following the Covid-19 pandemic present a chance for wealth managers to improve their relationships with clients and acquire new ones. However, the pandemic won't erase deep structural issues in the industry. Wealth management services are largely undifferentiated and highly commoditized. Offerings are essentially homogeneous, where any advisor can deliver a comparable service or product.
At the heart of the problem is the industry's practice of charging clients a fee calculated as a percentage of assets under management (AUM). This all-you-can-eat pricing model wrongly assumes that wealth is an indicator of needs and fails to account for clients' unique situations. For example, the financial advisory needs of a twice-married business owner and parent of three with $2 million in investable assets are considerably more complicated compared to a single person in possession of the same fortune. Yet under the AUM pricing model, both are charged the same fee.
This all-inclusive approach to pricing means clients' price does not reflect the services delivered. This makes value communication and price enforcement difficult.
Wealth management firms of all sizes must start to view pricing excellence as a competitive advantage. They must start to adopt research-based pricing practices to properly address client pricing sensitivities, enable value communications and meet diverse needs with differentiated product offerings.
The first step is to build an understanding of clients based on their unique needs rather than based on their asset level. Needs vary widely by customer archetypes. For example, my firm's recent study identified at least five customer archetypes based on the complexity of their financial advisory needs. DIY-ers or experts who are highly educated and knowledgeable use wealth managers for basic investing and advisory needs. By comparison, next-generation clients are younger, have lower asset levels and seek experts to help them acquire investing knowledge. There are also retired corporate executives who are more knowledgeable about investing but require an advisor to help them manage more complicated situations such as earned stock options and retirement. On the other end of the spectrum, we have client segments with complex financial advisory needs, including wealthy clients with multigenerational family members and business owners.
To satisfy the needs of an increasingly diverse client base, wealth management firms must look past the old one-size-fits-all product line to adopt modern, research-based approaches to meet their clients evolving wealth management needs. By using a value-differentiated product lineup accompanied by customer-friendly pricing and transparency into what services are included, a wealth management firm can easily defend the value of its offerings.
For example, the financial management firm Simonet Financial Group uses a needs-based approach to differentiate its offerings. The firm's prospective clients are presented with five package choices ranging in price from a one-time $1,500 option to a $25,000 annual option. Services offered under each package are clearly and fully communicated. A client with a complex financial life can quickly see the value in signing up for a premium package where they receive more than 20 hours of financial planning services per year, including complex services such as estate planning, education planning and small business retirement. By comparison, a client with a more straightforward financial life might see more value in getting a basic package.
This type of approach removes any cognitive strain on the client, making it easy for them to determine what is on offer, which offer is the right one to sign up for and whether it is worth the price.
Heuristics And Pricing
Another aspect of pricing excellence is to take into consideration heuristics, which are the cognitive shortcuts humans take to make quick decisions. They include concepts such as anchoring and framing.
In an experiment conducted by behavioral economists Amos Tversky and Daniel Kahneman, participants were asked to guess the percentage of African countries in the United Nations while observing a roulette wheel predetermined to stop at either 10 or 65. Participants whose wheel stopped at 10 guessed lower on average compared to participants whose wheel stopped at 65. The participants relied heavily on the initial piece of information, the roulette number (the anchor), when making subsequent decisions.
Consider a buyer trying to determine whether something is too expensive or cheap. The buyer needs a reference point to make that judgment. If a seller does not provide the buyer with a reference point, the buyer will automatically come up with one.
Framing and reference points are critical to properly communicate the value of your product or service. If you place a premium option first in a sequence, subsequent prices will be seen relative to this point. This reverse ordering of offers from highest value to lowest value is already widely used.
The issues arising from poor pricing practices are not going away and can make it challenging for the wealth management industry to fully capitalize on opportunities to emerge from the crisis stronger.