Despite widespread industry fears, financial advisory fees seem surprisingly robust in mid-2017 and should stay that way for the rest of the year, experts say.
Advisors fear fee erosion due mainly to increased competition from digital-based advisory services, increased practice efficiencies, and low-cost index funds and ETFs.
A new white paper from Envestnet cites some “compression” in the investment advisory space – but not for the reasons industry professionals may think.
“While there has been compression in the total fee charged to clients, high level trends mask the reality that the vast majority of fee compression has been driven by the compression of investment management costs rather than the component of the total client fee paid to the financial advisor,” the paper stated.
Guessing blindly about pricing trends has often led advisors to be concerned they are charging fees that are too high. On the other hand, firms may assume their financial advisors are charging submarket fees, the paper said.
Envestnet, which tracked 900,000 financial advisory accounts to come up with its data, reported that total client fees “have declined” over the last several years. The rate of decline seems to be driven primarily by the type of advisory program used, and not by clients fleeing the marketplace due to any perceived high costs of doing business.
Investment advisory fees fell slightly across the board, although fees did climb one basis point in a single client category – those with between $100,000-and $250,000 in assets.
In more affluent client categories, fees did fall on average, Envestnet reported, with the $500,000-to-$1 million category experiencing fee declines of four basis points. Client assets in the $5 million-and-up range saw fees fall by three basis points, the report stated.
The type of investment product advisors use also impacts fees, the report stated.
“In programs where client fees have declined the most, such as mutual fund or ETF wrap accounts or separately managed accounts (SMAs), advisors are seeking out the lower-cost passive solutions, bringing down overall client fees,” Envestnet stated.
Yet client fees in unified managed accounts (UMAs) that included only managed strategies “saw little erosion,” according to the report, falling by only three basis points.
“It’s believed that the UMAs’ potential to deliver more value to investors through accessible tax management and the simplicity of one account has contributed to the resiliency of client fees,” the report noted.
Envestnet also cited the “resilience of financial advisor fees” as money managers strive to provide more affordable service solutions while keeping revenues stable.
“In the case of SMAs and UMAs, where advisors have the opportunity to deliver additional value through tax management, financial advisor fees actually increased 1-to-3 basis points, whereas in MF/ETF Wrap and APM programs average advisor fees decreased 3-to-5 basis points,” the paper stated.
But ask an actual financial advisor, and he or she will cite their own reasons for fees remaining relatively solid in 2017.
“Advisory fees have remained steady because advisors are doing the same amount of work and bringing the same value to their clients’ financial lives,” said Pedro Silva, a financial planner at LPL Financial in Shrewsbury, Mass.
‘No Oversupply of Advisors’
Regulatory factors come into play, as well.
“In many ways, the new Department of Labor rules will likely reduce the number of advisors, which, in turn, means there is no oversupply of advisors willing to work for less,” Silva added.
Advisors have also been proactive in reducing the fees of the investments they’re choosing, he noted.
“By using ETFs, and individual stocks, advisors can reduce the overall costs of a portfolio while still providing active management and oversight,” Silva said.
To Silva, the idea that someone should do the same amount of work, but get paid less is unique to this industry.
“I can now go online and see videos on how to repair my own dryer, but that doesn’t mean the appliance repair person should be paid less,” he said.
Other advisors are turning the traditional fee model on its head, and opting for subscription payments models. That move resonates especially well with millennials, who are used to paying subscription fees for services like Amazon Prime and Netflix.
“A monthly subscription-pricing model is easy to understand and explain,” said Rosemary Linden, a money manager at Plan To Prosper Financial Strategies in
Del Mar, Calif.
Clients, particularly younger ones, appreciate transparent fee structures, Linden said.
“They can think of a financial planning subscription fee just like any other bill they pay for a monthly service, such as their cell phone bill or gym membership,” she noted.
Additionally, assets under management fees aren’t easy to explain.
“They’re often calculated based on your average portfolio value in a given quarter, and the percentage fee changes at different asset levels,” Linden explained. “You might pay one percent on the first $500,000 of assets, then 0.85 percent of the next $500,000, and so on. This blended fee structure can be confusing.”
The monthly subscription model helps “ensure that high fees don’t rob your financial future while fairly compensating planners for the value we add with our services,” she added.
There’s little doubt that the financial advisory is under pressure from several fronts. But for now, at least, fees remain relatively stable, and if Envestnet’s numbers are right, that should be the case for the foreseeable future.
Brian O’Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC’s Guide to Creating Wealth. He’s a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at firstname.lastname@example.org.
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