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The last time the stock markets plunged, many investment advisers lowered their fees.

They call this “sympathy pricing” in a new report on the state of the North American advisory business by PriceMetrix, a division of the global management consulting company McKinsey. If stocks end up being down in 2020, expect less sympathy from advisers.

It’s been quite the year already for the financial advice business. Clients are coping not just with volatile stock markets, but also with the loss of jobs and income in many cases. The PriceMetrix report looks at how events like these will shape the advice business in the future, specifically the impact on fees and the durability of client-adviser relationships.

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The report, released this week, is based on data from 25 North American wealth management firms and 65,000 advisers, with half the firms and between 15 and 20 per cent of the advisers from Canada. Driving almost everything discussed in the report is the rise of fee-based advice, where clients pay a percentage of the assets in their client account, typically 1 to 1.5 per cent annually or thereabouts.

PriceMetrix says almost 70 per cent of revenue generated in the North American wealth management sector comes from fee-based accounts, up from roughly one-third a decade ago. This growth has come at the expense of commission-based compensation, where advisers are paid through commissions on the purchase and sale of stocks and other investments.

It’s mainly commission-based advisers who were what PriceMetrix describes as “sympathy pricers” in 2008-09. Back then and afterward, 17 per cent of advisers offered discounts on their commissions to clients. The discounts were rolled back some as markets improved, but they stabilized at a rate below the previous peak. A long-term win for clients, then.

This kind of discounting is unlikely in a fee-based world because advisers take a hit as well when client portfolios decline in value. The percentage fee may stay the same, but shrinking portfolios generate a smaller amount in dollars and cents.

“Just like a lot of other folks, advisers are seeing their paycheques coming down during a period where they’re being stretched and having a lot to do,” said Patrick Kennedy, chief customer officer at PriceMetrix.

The report from PriceMetrix tracks fees for households with between $1-million and $1.5-million invested – people with smaller balances should expect to pay more. The average fee for the firms and advisers included in the report was 1.01 per cent for new accounts and 1.05 per cent for all accounts.

The rise of low-cost digital investing options such as robo-advisers and exchange-traded funds in recent years has driven a broad trend of falling costs in the investment industry. Fee-based accounts have been sucked into the fee-cutting vortex, at least for those with a minimum $1-million to invest. The Price-Metrix report says new account fees averaged 1.07 per cent in 2015, and all accounts averaged 1.16 per cent.

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Fee-based advice is popular on Bay Street because it generates a predictable flow of fee revenue for investment firms. Markets may rise and fall, but a firm knows it will always get its 1- to 1.5-per-cent piece of the action.

But there are also benefits to clients – pricing transparency, freedom from conflicts where advisers hype products offering top commissions, and a sense of a client-adviser partnership that benefits or suffers mutually through bull and bear markets.

One of the drawbacks of the fee-based model is that it can be costly by some measures. Even with lots of advice, a 1-per-cent fee on a portfolio mostly held in bonds is expensive in today’s low interest rate world. There’s also the problem of fees being locked in, with no connection to the actual level of advice or financial planning provided. Do-nothing advisers are protected in a fee-based model.

Still, clients do seem to like fee-based advice. PriceMetrix says the client attrition rate in 2019 for the wealth management sector as a whole hit an all-time low of 5 per cent. Stock market returns were certainly a factor here, just as they will work against adviser-client relationships if the stock market rally from the lows of March collapses.

PriceMetrix says 10 per cent of clients left their adviser in 2009, which is typical of what happens when falling markets hurt client returns. ”We’ve been doing what we do through two substantial bear markets and I can say we’re two for two on that,” Mr. Kennedy said. “I think it’s fair to say that we’re going to see elevated levels of client attrition over the course of the next year or two.”

Clients will judge their investment returns in the months ahead, but the more telling issue may well be the simple humanity their advisers showed in the pandemic. Mr. Kennedy said advisers should have stepped up the frequency of contact with clients and had in-depth conversations with them about more than just market stats and investments.

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“The concept of financial wellness – that’s the new work of the financial adviser,” he said.

Unfortunately, the PriceMetrix report identifies a trend that will make this higher level of advice harder to find unless you qualify as a high-net-worth client. The advisers who do the best job of keeping clients loyal are working with a more exclusive clientele.

The Top 25 per cent of advisers as ranked by their client retention served 140 households, while the bottom 25 per cent worked with 153. “In recent years, many advisers have prioritized relationship quality over quantity, choosing to serve more affluent clients more comprehensively,” the PriceMetrix report says.

Now, what about more emphasis on fee-based advice for the masses, with investments and financial planning combined for a reasonable fee? Far more than another ETF company or robo-adviser, this is what investors need.

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