How advisers were spared from the fee squeeze
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Fee compression is a competitive challenge right across the financial services industry — but US investment advisers have been largely spared a squeeze to their own profit margins.
That is thanks in part to the competition among asset managers and service providers to win registered investment advisers as clients, says Gabriel Garcia, head of relationship management in the adviser solutions team at custodian Pershing, part of financial services group BNY Mellon.
Instead, asset managers who create and sell funds have been “fighting” for adviser business by reducing their own portfolio management fees, Mr Garcia says. That has insulated advisers from some of the client pressure to reduce fees.
The average asset-weighted expense ratio of US open-end mutual funds and exchange traded funds dropped from 0.51 per cent in 2017 to 0.48 per cent in 2018, according to Morningstar’s US Fund Fee Study, published in April.
The big three ETF providers, Vanguard, State Street and BlackRock, which have been competing heavily on price in the past decade, came in with the lowest asset-weighted expense ratios, according to the study.
The competition for assets is just as strong among custodians, according to Mr Garcia. Custodians, companies who hold securities on behalf of investors, charged a commission of about $13 for each equities transaction a decade ago. That has since dropped to a range of $5 to $7.
“Fee compression is happening in the supply chain pretty extensively, but not in the advisory fee level,” Mr Garcia says. “The reality is we’ve seen tremendous price stability and even pricing power in the adviser fee-only advice model.”
The average yield on assets, fees charged by advisers on dollars managed, was steady at a range of 0.72 per cent to 0.77 per cent in the period from 2005 to 2015, according to Pershing data.
The average yield then dropped from 0.72 per cent in 2016 to 0.69 per cent in 2017.
However, rising client account sizes and tiered pricing, where advisers charge less for clients with significantly more in their account has increased advisers’ revenue per client from $7,200 in 2016 to $7,900 in 2017, Mr Garcia says.
“In aggregate, the actual dollars clients are paying their advisers is increasing.”
As for the tiering, clients with an account size of $250,000 were charged a fee of 1 per cent in 2017.
By comparison, clients with an account size of $25m were charged just 0.48 per cent, according to industry data from Schwab Advisor Services.
Despite the business model’s resilience, industry insiders say the fees charged by investment advisers can still be the difference between keeping or losing a client. In a survey of the constituents of the FT 300 Top Registered Investment Advisers in October last year, fees were identified as the second most-common reason for client account closures.
Still, switching to an investment adviser offering unique benefits was the top reason for switching, showing services are the most important differentiator between advisory companies.
The survey, conducted by FT publication Ignites Research, which compiles the FT 300 list, had 192 respondents with a total of $580bn in client assets.
“When clients ask about fees, they are not necessarily questioning the fee amount. They want to understand what they are paying for,” says Brian Vendig, president of MJP Wealth Advisors — one of the FT 300 companies highlighted in this year’s ranking.
Advisory companies that cannot effectively explain their fees to clients are the ones who may end up losing clients, Mr Vendig says.
A decade ago, says Mr Garcia, advisers typically focused on the core service of providing investment advice.
Today, many advisers are providing clients with multiple services — including but not limited to cash management, college planning, estate planning, tax planning, financial planning, liability management and insurance services.
“They’re not lowering their fees, they’re adding more services,” Mr Garcia says.
“If an adviser’s core proposition is purely investment management, their pricing power is at risk, especially if they serve the high net worth and ultra-high net worth marketplace.”
At advisory company Ingalls & Snyder, another FT 300 constituent, the goal is to keep its “all-in” fee as low as possible and cut costs by investing in technology.
About 90 per cent of Ingalls & Snyder’s client assets are charged an all-in fee because the company invests directly in stocks and bonds.
The remaining 10 per cent of client assets is allocated to investment strategies where the adviser has no particular expertise.
Chief executive Robert Case maintains that its active portfolio management charges are competitive, because most clients “are only paying a single investment management fee and not fees on top of fees charged by an asset allocator and subadvisers, which is the common business model in our industry”.
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