So-called sympathy pricing, or discounting, of transactional trades runs rampant in the full-service brokerage industry, says Patrick Kennedy, co-founder and VP, product and technology, for the intelligence-solutions firm PriceMetrix. Here, he talks with contributor Michelle Lodge about the results of his company's three-year study that tracked 7 million retail equity trades in the United States and Canada.

1. What did you learn from the research?
We looked at January 2009 through January 2011 and found that the average ticket size increased from $224 to $231and the percent-of-principal ratio rose from 1.02% to 1.15%. In spite of these increases, advisors continue to leave $132 per trade on the table. Our data show that advisors discount two-thirds of all trades and that the average discount per trade is 35% off of the scheduled price. We saw an awful lot of advisors who reduce prices when markets go down. That's scary for the industry, because it suggests that the value they deliver to clients is a function of market performance. If they are doing that, they are not bringing value to the table that transcends market performance. That means the industry is not going to do well in the long run. Advisors need to maintain confidence about the value they deliver to clients in a way that mututal funds cannot; in a way that index funds cannot.

2. What do advisors engaged in 'sympathy pricing' do when the market rebounds?
They don't recover their foregone production during a subsequent market upswing. We found that, generally, clients are investing for the long term, which is one reason it makes sense that a rational pricing strategy is best held in good times and bad.

3. What is the 'lottery of the small household'?
It's the misguided belief that small households will become large households eventually. The truth is, that's rare. It happens one in 1,000 times. We call it winning the small household lottery. Those small households (less than $100,000 in assets) get the biggest discount, even bigger than medium-size households. In fact, in some situations, more than half of an advisor's clients pay less than $300 a year, yet the advisor spends a good deal of time with those clients when he or she could service high-net-worth clients. that practice severely erodes earnings.

4. What is the good news about advisors and their fees?
Advisors who raised their prices over the past three years improved their business and experienced less client attrition than advisors who did not raise thier prices. In fact, the average production for the group that raised their prices grew by 12% compared to 9% for the non-raisers, and return on assets increased from 0.63% to 0.69% for the group that upped prices, but remained flat for who did not. "Raisers" saw a greater increase in the number of households on their books that generate $2,500 or more in annual revenue (core households). "Raisers" grew their number of core households by 10% in the three-year period compared to 6% for other advisors. in addition, revenue concentration risk (the percentage of revenue generated by the top 10 households in an advisor's book) decreased by 5% for the group that increased prices and grew 2% for the non-raisers. The [study] suggests that strong advisor-client relationships can support repricing and that clients are willing to pay for trusted advice.

5. How can the industry address the discounting of fees?
Sharing information with advisors about market pricing is important. Advisors are often in the dark about what other advisors are charging. The industry needs to give advisors access to average price levels and what the top producers are charging.