One of the key trends in the asset management and wealth management industries in recent years has been fee compression.
The latest research from Cerulli Associates examines how asset managers in particular have been impacted by fee compression. Cerulli found this trend has impacted asset managers “most starkly.”
According to Cerulli, asset managers have seen the average, asset-weighted fee for a U.S. equity fund fall from 85 basis points in 2012 to 72 bps in 2017, a nearly 10% annual drop. The average taxable fixed-income product fee declined from 66 bps to 55 bps, a 13% annualized drop during the same period.
Cerulli says that industry participants are caught in a circular logic of cause and effect.
“As the industry reacts to fee pressure, the solutions it creates only amplify these trends,” according to the research firm.
For instance, asset managers may be accelerating a race to the bottom in fees by offering technology platforms and asset allocation advice at a low cost.
Cerulli’s research examines some of the multiple causes of fee compression in asset management, which then compound upon each other to prompt industry change.
For example, according to Bing Waldert, director at Cerulli, greater regulation has formalized the buying process and created demand for low-cost passive products.
“Under the influence of professional buyers, eliminating the highest-priced products is often the first screen, creating a race to the bottom as managers try to avoid having above-average fees,” Waldert said in a statement.
The increasing importance of asset allocation advice is another cause fueling a decline in asset management fees.
In some cases, asset managers are dropping fees on asset management products to near zero, instead choosing to charge for asset allocation, a task traditionally performed by the wealth manager, according to Cerulli’s research.
According to Waldert, “the growth of asset allocation advice demonstrates how asset and wealth managers are using these industry trends to enter each other’s value chains and attempt to capture a greater share of a shrinking fee pool.”
Cerulli also expects that automation will continue to compress overall fees in both asset and wealth management.
According to Cerulli, automating basic transactions will bring down their cost and ultimately reduce the overall cost to the client.
“Automation will lower the cost of transactions, bringing down fees in wealth management,” Waldert said in a statement. “In addition, digital advice platforms emphasize asset allocation, which pressures fees in individual asset manager products and benefits exchange-traded funds.”