Measuring Price Compression

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Total U.S. automobile fatalities plunged in March 2020 from the same month in the prior year, indicating people are driving more carefully. If you read that statement from a news source you would laugh because you know that in March 2020 much of the country was in lockdown due to an emerging pandemic, so many fewer cars were on the road. The author is taking facts out of context and drawing the wrong conclusions.

Yet all too often I read a consultant’s analysis or hear a Wealth Manager’s statement that price compression is evident because basis points have been dropping over the last 10 years. This is lazy and unhelpful. The context that is missing is that the market has been rising for years, and by and large Wealth Management fees are calculated on a sliding scale of tiered prices. When the average portfolio size increases, overall basis points will inevitably fall unless prices increase enough to offset this. In the Quantifacts 2018 Comparison of Prices and Discounts, comparing our population of participants that were in both the 2014 and 2018 comparison (“same store sales” analogy) we found that the average portfolio size had increased by 22%.

Further context is that the mix of account types has been changing over time within the managed categories of IMA, IRA, Rev and Irrev Trusts. With Irrev Trusts typically priced between 10-20 bps higher, banks that have been opening more IMA’s vs. Irrev Trusts over time will naturally see overall basis points decline without any changes in prices or discounts.

To understand if there truly is price compression showing up in the data you have to control for the changes in portfolio size and account type mix. Quantifacts did this in our 2018 Comparison of Prices and Discounts and is in the process of updating it with 2020 results. What the crosstab comparisons show is critical to understanding price and discount changes in the industry, and how price and discount changes vary by size of relationship. We like to focus on these questions:

  • Are Wealth Managers changing prices, and if so, are prices increasing or decreasing?
  • Are Wealth Managers offering more discounts?
  • Are IMA’s impacted differently from other account types due to competition from RIA’s?
  • For all of the above, how does this vary by size of relationship? Is there price pressure on small IMA’s that we don’t see for larger relationships?

Before you change your price and discount strategy, make sure you understand what’s really going on with price in this industry.

Published 9/29/20