Recent attention to the high price of financial advice means that consumers now benefit from a lower-cost environment in which to deploy their investable assets. How does this price compression manifest in advisory firms? Interestingly, the custodians, mutual fund companies and other providers are covering the costs, at least for now.
The 2016 InvestmentNews Financial Performance Survey, sponsored by Pershing, revealed that most advisors who made price adjustments in the preceding year actually raised fees by five to 10 basis points. Further, the median fee advisors charge on assets under management (AUM) has remained steady for the past decade at 77 basis points.
Now, a new survey by Bob Veres of Inside Information provides additional insight into how the advisory profession is managing the price/cost/value equation in their practices and how consumers are benefitting.
The study confirms that the total cost to consumers has come down, driven mostly by those who support the advisors rather than by the advisors themselves. In breaking down the cost to clients, the advisor fee is just a portion of expenses that also include the underlying investment products the advisor uses, including mutual funds, ETFs and other packaged solutions. According to the Veres study, the median expense ratio on these products is 0.50%, but this ratio can be as high as 2%.
If the median fee is 0.77% and the median expense ratio is 0.50%, a client’s all-in costs would be 1.27% or 127 basis points. Based on the Veres study, it appears that many advisors are charging fees above the median, are using more expensive financial solutions for their clients or both (see Table 1).
Beyond the transparency regarding underlying costs to consumers, the most startling finding of the Veres study is the noted shift away from variable or asset-based pricing to a fixed pricing model.
The survey covered a range of business models, and more than 30% of the firms that participated use a retainer or hourly rate as part of their fee structure. Roughly 5% were retainer-only and many had a blend of pricing models.
This trend may provide a clue to what the advisor of the future will look like.
Advisors who have made the move to retainer or hourly rates seek to align their charges with the services they deliver, rather than the value clients bring. As an example, in the Veres study, the median advisory fee for assets of between $1 million and $2 million was 85 basis points. Does the larger client in this bracket actually require more of the advisor’s time and attention that would justify the higher cost?
The Evolution of Pricing
Historically, financial services firms charged clients a commission based on transactions or a fee based on assets. This has been the easiest way to differentiate between a broker and an advisor, though it’s important to acknowledge the considerable differences beyond pricing.