How to Guard Against Price Compression
Source: FA-IQ, Feb. 16, 2017
BRUCE LOVE, MANAGING EDITOR, FINANCIAL ADVISOR IQ: Hi. This is Bruce Love with Financial Advisor IQ. And I'm here with Josh Pace, CEO of Trust Company of America. Josh, you've been looking at fees for advisors. And they're under quite a lot of pressure these days, both in terms of trying to decrease them and trying to maximize what they're providing for them. What's your thoughts?
JOSHUA PACE, CEO, TCA: I think advisors, in many respects, are under siege and that the price compression is real. And what advisors have to do is avoid offering the same service for, let's say, half the fee or revenue. And they need to be able to change their approach to feeding their clients and have some more a la carte options, which allows an advisor to build it its way to what they feel is a fair wage for the services that they provide to their clients. So a great example would be that asset management, in its purest sense, might be defined somewhat by the robos. That's 50, 60 basis points.
And if that's all you're doing for a consumer, it may be hard to justify a fee much larger than that. However, what if we offered or an advisor offered a financial plan? There's an added fee in that arena.
Or an advisor wants to offer a socially responsible investing alternative. Great. And there's a separate free from that. And that gradually allowed the consumer to drive their own journey in terms of what they're willing to pay. And that protects the advisor from doing all the work for half the rate.
BRUCE LOVE: So, Josh, not only is there price compression issues for advisors at the moment, which means the prices are going down and they're trying to do a lot more for them. There's also transparency issues, particularly, at the moment, with potential regulation changes. What do advisors need to think about when they're thinking about transparency with their fees?
JOSHUA PACE: I think a couple of things come to mind as relates to fee transparency. I think one is some degree of levelization and making sure that some accounts aren't disadvantaged versus others based on size, at least in a dramatic sense.
And in terms of other opportunities for fee transparency, sometimes it gets down to the total cost of ownership, which is what is the total cost of the service a client is receiving? And it's not just the advisor fee or the custodial fee. But there is product fee, et cetera, and to be able to openly walk a client through all the layers of fee and not fear it. And I think that's part of the issue and that sometimes the fees are cloaked in darkness.
BRUCE LOVE: Are there better ways to communicate fees to clients?
JOSHUA PACE: Well, for starters, they've got-- through their management agreements, they should go above and beyond in terms of their transparency in fees, for sure. And that's really the best way. Then I think, when they're updating their management agreements, they have a choice of whether to go above and beyond in transparency or try to take the minimalist approach. And what we see as the best practice is to go above and beyond. And actually, it protects the advisor over the long run as well.
BRUCE LOVE: Josh, we're in a point of flux with regulation at the moment. Now whether or not the fiduciary rule from the Department of Labor comes through, is watered down, is rescinded, what's your thoughts on the idea of a fiduciary and how that will be important for advisors moving forward?
JOSHUA PACE: I think for us, our advisors are fiduciaries to begin with. I believe a lot of this regulatory-- I wouldn't characterize it as noise. But it's somewhat overblown because there's been a seismic shift in the industry already.
And it's not about, will DOL will occur or not occur? It's already happened. And what that means is that advisors need to adopt to the new practices. And that means gathering more information from their clients. And it's important that they've got a set of technology behind them that helps them automate their processes, as opposed to drowning in paperwork.
So as far as I could tell, it's here to stay, regardless of whether or not it's imposed from a regulatory standpoint. Because the regulatory angle could be that, well, gee, as an advisor-- because it's defanged or whatever, well, there's nothing to comply with. But your competitor down the street might be selling a highly transparent approach that really puts the fiduciary standard, or at least the attributes of the fiduciary standard, at the forefront. And they're selling against you.
So in the end, you're forced to comply with it. One, it might be the right thing to do. Two, your competitors are already doing it. And three, it's not a regulatory thing because the change has already occurred.
BRUCE LOVE: Josh, a lot of people are trying to argue that because there's been so much noise about the fiduciary rule, that actual, real investors in America really do understand what fiduciary is. Do you seriously believe that?
JOSHUA PACE: They are absolutely aware in that it's found its way into pop culture. When John Oliver does a 22-minute piece on the fiduciary standard, you know it's out in the consumer consciousness. So it's not just limited to financial trade publications or something along those lines. It's out in the world.
And consumers are aware of it. It gets covered in radio spots all the time. And so because of that, that's why an advisor is forced to react to it, because in the end they're going to be asked about it by their clients.
In fact, even for us at TCA, we actually put together a sheet of information so an advisor can repurpose and share around the dining room table with their clients, because they've heard something about it. They may not fully understand it. But an advisor can use that as an opportunity to actually grow closer to their clients, not further away.
BRUCE LOVE: Josh, thank you very much.
JOSHUA PACE: Thank you.