Jason Brown and Simran Ahuja co-wrote this blog post with Abhay Patil.
Financial advisors have to weigh a variety of factors when deciding whether they should switch firms and which firms to switch to. While the level of support, technology, firm reputation and growth opportunities are all common considerations, one often overlooked aspect is the structure of service fees advisors pay to broker dealer firms. Advisors, consciously or subconsciously, care about more than just the total fees (out of pocket costs). The structure of service fees and how they associate those fees to the benefits they receive also plays a crucial role.
ZS created a survey to measure financial advisors’ priorities when evaluating offers and how they make tradeoffs when selecting an offer from a competing firm. Advisors were given a series of offers with different pricing structures (mix of fixed and variable fees, weighted for gross dealer concessions, or GDC levels) and were asked to select the most compelling offer. Offers were calibrated to show a wide range of options: GDC cut to the broker dealer, various service fees charged, and so on.
Surprisingly, advisors did not always pick the offer with the total lowest fees paid to broker dealer firms. In some cases, advisors selected offers that had 20% higher total fees in order to achieve lower fixed service or technology fees.
It seems that when considering switching firms, advisors care about more than just the total value of the offer package. They care more about how that package is composed. Based on our research, here are three key takeaways on advisor preferences:
- Advisors are more sensitive to fixed fees than variable fees. We believe this may be true for several reasons:
- It’s easier for advisors to conceptualize the cost of a fixed fee relative to a variable fee.
- Advisors expect broker dealers to help with their growth. As a result, they’re more comfortable paying variable rates because they’re more directly tied to the advisor’s growth.
- The perceived value in technology or service may not equal the cost; if advisors see a technology fee as expensive, they may reject it.
- Advisors prefer pricing structures they’re familiar with. While the wirehouse advisors in our study tended to select the offers closely resembling current wirehouse offers, independents stayed away from those options. This may be explained, in part, by the fact that many advisors were unfamiliar with certain pricing components of new offers that were shown. Many advisors are risk adverse and may be less likely to move if they don’t fully understand what they’re signing up for. Transparent and easy-to-understand offers can help overcome the tendency for advisors to stay with familiar pay structures.
- Advisors are skeptical of offers that vary from the norm. When the advisors in our survey saw a radically different offer with lower fees and higher grids/payouts than they currently pay, the majority of them still stayed with their current plan, claiming the new approach was “too good to be true.” Financial advisors are generally uncomfortable with offers that challenge industry conventions and tend to dismiss them.
Ultimately, there is no one one-size-fits-all approach to motivating financial advisors to switch firms. Practice differences and advisor knowledge, preferences and experiences vary widely. Since advisors tend to stick with the status quo, broker dealers should add flexibility to their offer structures if they want to recruit a large and diverse population of advisors. While about 50% of advisors in our survey said the proposed offer was better than their current financial arrangement, only 33% said it would be enough to motivate them to switch. If they want to recruit more advisors, wealth management firms need to do more than just put the best rates on the table.