Your “All In” Fee… The Price is Right?
The Investment Advisory landscape has been moving a lot faster these days. M&A activity continues to make headlines regularly. The business of investing continues to go through a tech “disruption” that is sweeping through business sectors with greater momentum everyday. The result is simple, more fee compression for advisors.
But what part of the fee is getting compressed?
Advisor “All In” fees across different investment solutions.
* Average – Based on Kitces July 2017 article
”Financial Advisor Fees Comparison – All-In Costs For The Typical Financial Advisor?”[/caption]
So, if fee compression is the problem, then we better dig into the details to understand exactly how advisors are slicing up the pie. Robo solutions have the least investment management and other client service intensive activities with the lowest product and platform fees. Traditional SMA’s are on the opposite side of the spectrum, usually the most service intensive activities with higher investment management, product and platform fees.
Fee analysis based on investment type / AUM level.[/caption]
The last Veres study found that many advisors view their AUM fee as an even split between management services and non-investment services that are simply paid for via an AUM fee. In other words, the typical 1% AUM fee is really more of a 0.50% investment management fee plus a 0.50% planning fee.
In reality, there is virtually no relationship between an advisor’s fees for a $1M client, and the breadth of services the advisor actually offers to that client! As the breadth of services to the client rises, the advisory fee should rise as well to support those additional value-adds. Instead, though, the a Fidelity study found that the median advisory fee of 1% remains throughout, regardless of whether the advisor just offers wealth management, or bundles together 5 or even 9 other supporting services.
When you consider Robo offerings with Passive or Hybrid investment choices and compare them to traditional SMA fees and services provided, it starts to become clearer about how the break downs differ. Consider fee compression when slicing the pie into investment management, financial planning, platform, and products fees.
Looking at the investment solutions in the chart above we can then analyze the components of how the fees breakdown. Using this information can help you set your fees at the appropriate levels and better understand the competition.
- Planning / Analysis – There are no planning / analysis expenses allocated to the robo solutions and passive choices are noticeably cheaper than typical.
- Management – There are no management expenses allocated to the robo solutions and passive choices are noticeably cheaper than typical.
- Platform – The only constant is that all solutions absorb a platform fee.
- Expenses – Investment related expenses are minimized in the passive and robo solutions.
The fact that the typical financial advisor already allocates only about half of their advisory fee to investment management (albeit with a wide variance), suggests that there may actually not be much fee compression looming for financial advisors. After all, if the advisor’s typical AUM fee is 1% but only half of that – or 0.50% – is for investment management, then the fee isn’t that far off from many of the recently launched robo-advisors, including TD Ameritrade Essential Portfolios (0.30% AUM fee), Fidelity Go (0.35% AUM fee), and Merrill Lynch Guided Edge (0.45% AUM fee).
At worst, the fee compression risk for pure investment management services may “only” be 20 basis points anyway. And for larger clients – where the fee schedule is falling to 0.50% anyway, and the investment management portion would be only 0.25% – financial advisors have already converged on “robo” pricing.
If you haven’t read the Kitces July 30th 2017 article “Financial Advisor Fees Comparison – All-In Costs For The Typical Financial Advisor?”, you can find it here:
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