Reports of fee compression among financial advisors are overblown, according to new analysis from Envestnet, whose software helps financial advisors manage client accounts and enhance their practices.
Its Envestnet|Yodlee Analytics division reviewed more than 900,000 accounts from various types of advisors charging fees based on assets under management and found little change over the three years from 2014 through 2016.
Advisor fees dropped by two to four basis points overall, but average fees actually rose one basis point for accounts in the $100,000 to $250,000 range, according to the Envestnet report, which analyzed accounts of advisors at independent, bank and insurance broker-dealers advisors and at RIAs operating independently or as part of an advisor network. Wirehouse advisors were not included in the report because they’re generally not Envestnet clients.
The biggest decline in fees was just four basis points in accounts between $500,000 and $1 million. Accounts between $1 million and $5 million saw fees fall two basis points and above $5 million, three basis points.
“There’s minor fee compression, not what we would have thought,” said Frank Coates, executive managing director at Envestnet|Yodlee.
“Advisors should look at these results. The headlines may be trying to scare us but we’re doing a pretty good job. Fee compression hasn’t really started.” Coates described the decline in advisor fees as “very gradual.”
The Envestnet report also breaks down fee levels by distribution channels over the 2014-2016 time period. Fees for RIAs were unchanged at 0.98% and down just one basis point for advisors in independent advisor networks, at 1.09%.
The biggest decline was for insurance broker-dealers, with fees falling to 0.93% from 1.02% and 1%, respectively, in 2014 and 2015. They fell two basis points for independent broker-dealers to 1% from 1.02% in 2014, and one basis point for bank BDs, from 1.13% to 1.14%.
The report also looked at client fees, which include administrative, platform and investment management fees on top of advisor fees, and found that client fees are declining at a faster rate than advisor fees, especially among accounts between $1 million and $2 million in AUM and over $5 million AUM. But in both cases, the contraction was just 6 basis points to 1.01% and 0.76%, respectively.
“Clients are paying a little less because of efficiencies,” says Coates.
Asked about the potential impact on fees from the Labor Department’s fiduciary rule, which begins to take effect on June 9, Coates said there will be additional costs for advisors to comply, but they could have difficulty passing that on to clients in the current environment.
“Someone will have to bear the costs, but I don’t expect clients will be paying more,” said Coates.
“The DOL is not making us sound great, robos are not making advisors sound valuable and increased disclosure will make it difficult to increase client fees.”
That said, he doesn’t expect advisors will cut fees dramatically if at all. “Advisors are remarkable at digesting changes to rules and outside forces and being able to package the value they present to clients in ways that they get paid fairly for the value they present.”
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