Advisors who demonstrate consistency in their pricing strategies outperform their peers, new research from PriceMetrix shows.

The report examines the pricing issue, which has come to the fore in wealth management, on the retail brokerage side. The industry has found its margins squeezed due to the downturn and has also come under fire for the inconsistency of its pricing.

The PriceMetrix report was focused on transactional equity commissions, with data covering 15,000 advisors and 3 million retail investors over a three-year period ending June 2011.

Looking at two measures of pricing ratios, pricing has become remarkably unstable during the volatile markets of 2008 – 2011, the study demonstrates. In this period, at its low price realization (PR) (the percentage of the scheduled price of a trade that is charged) fell to below 60 per cent, meaning that large discounting was taking place.

“At an aggregate level, one could conclude that the message being sent to the investing public is that the value of advice declines when the market declines,” the study says.

Transactional pricing has recovered from the depths hit in the crisis, but advisors continue to leave around $132 per trade "on the table," says PriceMetrix. The firm’s data shows advisors discount two-thirds of all trades and the average discount is 35 per cent. Other figures show half of advisors have a PR ratio under 70 per cent, while only a minority (13 per cent) discount little or nothing off their firm’s pricing schedule.

Household asset size

The size of a household’s assets affects the pricing schedule.

According to the study, households with less than $100,000 in assets receive an average discount on trades (of between $10,000 and $25,000 in principal) of 32 per cent; households with $100,000-$1 million receive an average discount of 28 per cent; and households with $1 million+ of 36 per cent.

Looking at average household annual revenue generated for the advisor, small households account for only $364 each, while medium households for $2,884 and HNW households for $16,772.

Two factors stick out here. One is that small households generate little revenue, yet receive discounts of around $116 per trade, according to PriceMetrix. Secondly, lifting prices by 5 per cent for HNW households would result in a $4,800 increase in annual revenue, the firm says.

Raising prices = good for business?

One of the key findings of the report is that raising prices is actually good for business and does not result in significant client attrition.

All advisors in the sample on average reduced the number of households in their books by 6.1 per cent over the last three years. However, for the sub-sample of advisors who did not raise prices, there is a reduction of 9.4 per cent.

Advisors who did raise prices also saw a larger increase in the number of households in their books generating at least $2,500 in annual revenue.

Another problem is “sympathy pricing,” says PriceMetrix, as those advisors who follow the market down do not reset their prices as quickly when markets rise again.

"As we're seeing once again now, providing good advice to investors during volatile times is one of the most important services an advisor can offer," said Doug Trott, president and chief executive of PriceMetrix. "Clients pay for the advice and experience of their advisors. They do not expect a discount when market performance is poor, any more than they expect to pay a premium when market performance is strong. "

Significantly, the report found that advisors who priced trades consistently over a three-year period outperformed those who didn’t. The “consistent pricers” tended to have smaller but more productive books with an average return on assets of 0.76 per cent compared to 0.71 per cent for the control group.

"Advisors who price rationally and who demonstrate consistency outperform their peers," added Trott. "Advisors should consider the value of their advice balanced against the value of the client relationship when they discount. Any revenue they may lose by offering a discount, they should get back, either through a referral to a new client or a greater share of the client's wallet."