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.
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