- Written by Jessica Houston
The changing financial services environment, where there is pressure on margins, means that institutions are seeking out alternative sources of revenue, e.g. fee based or new arrangements with revenue generating components. In particular, the poor performance of many fund managers and financial planners has focussed attention on the basis for charging fees and the level of fees that many charge. Clients are looking for fund managers to have “skin in the game” with performance fees on the nose, and are giving greater importance to receiving independent advice. Pricing is also determined by competitive pressures and it is readily apparent from the home loan market that heavy discounting will increase market share, albeit at the cost of short term revenue and potentially poorer credit quality. For banks, system credit growth is a key determinant of future profitability and this factor must be considered in any pricing models, along with the factors mentioned above.
Revenue models are again changing for a number of reasons, most importantly because of the internet, as customers are dis-intermediating and going directly to the end provider. Commissions and fees are being driven down and shelf space is becoming an issue. This has meant an increased Cost of Acquisition (CoA) as Search Engine Optimisation (SEO) and Search Engine Marketing (SEM) techniques are fundamental for appearing on page 1 of search engines. Financial Institutions are advertising more aggressively in this space and are now using social media as part of their sales and marketing tools. This is all having a significant impact on the pricing and fee models, as customers are able to switch channels at no extra cost.
Product bundling v unbundling is a strategic pricing decision. The regulators seek, and are legislating for, greater disclosure of the components of a product while distinguishing between “advice” and “sales”. At the same time products and services are becoming more integrated as financial institutions seek to bring better products to market and improve cross sell. Overlaying this is the need to identify, understand, measure and manage the risks of these bundled products.
Chairmont’s work in this area has been wide and extensive including developing revenue models, reviewing all banking transaction account fee structures, understanding and developing bundled and unbundled product pricing strategies, determining components and levels of Management Expense Ratios (MERs) in the funds management area, consideration of fees and pricing structures for loan products and working with insurance clients and their actuarial teams on the pricing of their products.
Please refer to Case studies for an example of Chairmont’s work in this area.