Industry report sees clouds gathering for fee-based practices, as well as advisors who've focused on holistic wealth planning
North American wealth advisors who benefited from asset-based compensation models may soon have to change tack, suggests PriceMetrix in a new industry analysis.
In The state of North American retail wealth management, the consultancy noted how 2019 marked the end of a long bull run for clients and wealth managers alike.
Median assets per advisor were reported at US$120 million by the end of 2019, representing 8% compound annual growth since 2015; over the same period, revenues per advisor reached US$717,000 off of a CAGR of 5%.That was powered by the twin tailwinds of positive-performing financial markets and the growing popularity of fee programs over transaction-based models.
“One result of asset-based fees is that advisor pay will decline in bear markets, as 2020 will mercilessly demonstrate,” the report said.
A significant chunk of revenue and assets is set to erode following the coronavirus selloff. As of 2019, fee-based assets accounted for an estimated 49% of the North American industry, and fee-based revenue represented 69%.
Practices may also have to expect a mild shrinkage of their books in the year ahead, as past PriceMetrix research points to a higher risk of client departures during market downturns. That incudes 2009, when a reported 10% of clients left their advisors to set the highest rate advisor switching of the last 12 years. Having more client assets in play may be beneficial to go-getter advisors; those who focus on adding new clients have been shown to outperform their peers during downturns.
But there’s much to be said for advisors who have prioritized relationship quality over quantity. According to PriceMetrix, those offering more holistic planning to a smaller base of clients have flourished, with accounts per household rising from 2.7 in 2015 to 3.1 in 2019. And even after adjusting for market performance, average client size has increased by a reported 13% over the same period.
They have also found that top advisors in terms of client retention — specifically, the 25% with an average annual attrition rate of just 1% from households with over US$250,000 in assets — also have deeper and fewer client relationships. This may be a function of their ability to better give clients the time and attention they expect.
“This dynamic is particularly relevant in periods of market uncertainty,” PriceMetrix said.
The long-term trend toward deeper relationships, underpinned by high-quality service such as comprehensive wealth planning, holistic portfolio design and execution, and coaching is now facing a major litmus test. The COVID-19 crisis is affecting clients more profoundly than the 2008 crisis did, notably as business owners get hit both on the portfolio and the business income side.
“[A]dvisors who are passive and reluctant to step up and serve their clients will see disproportionately more clients leave,” the report warned.
