Helping brokers price their services
PriceMetrix gives advisors the confidence to charge a fair price and not give away trades

June 2003, by Hugh Anderson

His brokerage clients sit up and take notice, he says, when they see the dots scattered over an extraordinary range from almost 0% to more than 100%: “Then, I may be able to tell them that, say, one in four of the transactions were done at or below what the firm’s own discount brokers charge.”

Trott’s firm, Toronto-based PriceMetrix Inc., is in the business of helping investment dealers price their commissionable trades properly. If they do, his firm promises more revenue from existing business and improved profits.

The problem in a transaction-based world, however, is that the only way an advisor gets paid for advice is to include the price of advice in the price of the trade. If advisors strip down the price of the transaction — as they did when discount brokers threatened their businesses in the 1990s — they put low or no value on advice. Trott says overall percentage commission margins in the full-service business have declined to the current 0.8%-1%. That makes valuing and pricing advice crucial to survival.

“The biggest thing we’re doing today is redefining the value of full service to the client,” says Lorne Harper, head of full-service brokerage at RBC Dominion Securities Inc. in Toronto. “We are finding clients are coming to us with complex situations and looking for more than a trade. The business has evolved well beyond transactions.”

One response to evolving client needs is to convert commission business into fee-based business with various in-house managed products. The second response is where PriceMetrix comes in: to try to make some sense of pricing practices in the commission business. But what should a full price be and how big is an excessive discount?

At Toronto-based ScotiaMcLeod Inc., managing director James Werry says the tools developed with PriceMetrix have given SM’s 850 advisors the confidence to charge a fair price and not give away the trade. “What we want to do is help them understand the various ways of valuing the service they give their clients,” says Werry.

Each ScotiaMcLeod advisor now receives a monthly analysis of how he or she prices the business compared with the across-the-board statistics of their peers. They also have an online tool that suggests what a reasonable price would be based on the average for the firm’s brokers on a comparable trade. “Pricing is Business 101, isn’t it?” Werry says. “We want them to have a good understanding of what a fair price is. Maybe some were too sensitive to prices in the discount world.”

For his presentations to potential clients of his firm, Trott needs and gets confidential internal data. He is discreet about disclosing what he has learned from particular firms but says his reports typically show wide dispersion of pricing for trades. “A typical response is there are reasons for [the wide dispersion]. This rep has more large clients. This rep does a lot of group business. So we say, ‘Let’s take a look. We’ll do the analysis again and exclude the special circumstances.’ How long’s that going to take? An hour or so. That gets them interested.”

The idea is not to beat up the reps, he says, although some reps are their own worst enemies on pricing. “We’ve even pointed out that some were charging their clients less than on their own ‘pro’ trades for their own accounts, which doesn’t make a lot of sense.”

Trott says it’s fine for a rep to decide to do “a Chevy business or a Lexus business.” The important thing is to know your strategy and follow it intelligently.

In a way, the PriceMetrix reports and tools merely do what good reps and branch managers have always done when they calculate their “turn” rate (the rep’s gross commission revenue as a percentage of assets with the firm). But it does it in a more precise, up-to-date and convenient manner.

This turn rate varies with the kind of business done, of course. A book consisting mostly of younger and upwardly mobile professionals and entrepreneurs might produce 1.5% or more. One consisting mostly of retirees might produce just 0.5%. But if a rep with the former business mix was producing just 0.5%, he or she would probably like to understand why.

This lives on as the price/assets ratio in the PriceMetrix report, available online at any time to any ScotiaMcLeod rep, but it’s a pretty crude broad-brush measure. More useful is the calculation of the price charged as a percentage of trade principal for every commission trade. The report includes detailed information on the specific sources of revenue from a rep’s book, on whether the book is gaining or losing clients, on the proportion of revenue coming from what the rep defines as “priority” business, on the proportion of fee-based business and on the percentage of list price charged.

Branch managers get the same information for all their reps and for the branch as a whole, including weighted average numbers for each rep.

But the reports don’t leave the numbers to speak for themselves. Reps can call up “user guides” that show their performance in relation to their goals and peer group as well as suggestions on how to improve pricing, business and client management. PriceMetrix can provide dozens of track-record examples, Trott says.

And for the moment when a client asks what the charge will be for a particular trade, there is an online calculator designed to take the worry out of coming up with an answer. Among other things, the tool shows a so-called “reference price” — what the median client is being charged by the rep’s peer group at ScotiaMcLeod. It also shows what selected competitors are believed to charge for a similar trade, and what the firm’s own discount broker would charge.

Trott says his firm is building a similar service for fee-based business. He is also pitching to U.S. firms.

Werry says ScotiaMcLeod is pleased with the results: “Margins in the full-service business have come down overall, but they’ve stabilized in recent years at our firm.”