Fee-based pricing for financial advice is on an upswing after years of downward pressure in the industry — from cheaper investment products to low-cost robo-advisers. Fees charged on assets under management even fell below the standard marker of 1% in 2013.
But
a new report finds the falling trend reversing. Advisers charged an average of 1.02% on client assets in 2014, compared with 0.99% the previous year, according to a PriceMetrix Inc. report released last Monday.
Industry analysts wonder whether fees have finally hit rock bottom and the upward trend will continue.
Philip Palaveev, chief executive of The Ensemble Practice, said quality advisory firms have feared for years that they would have to lower fees because of market pressures. Instead, these advisers are offering more services and trying to be better at what they do, he said.
“Advisers have the feeling they need to do more for every buck to not lose a client,” he said. “In some ways, that's a form of price pressure.”
The amount advisers charge for fee-based accounts had fallen consistently each year since PriceMetrix, a practice management software firm, began tracking the rate in 2009. That year, advisers charged an average of 1.2%, said Patrick Kennedy, co-founder of PriceMetrix.
The process of advisers transitioning clients from transaction-based pricing to fee models was one factor that likely had been putting downward pressure on fees for a number of years, Mr. Kennedy said.
“The data suggests advisers and firms are paying more attention to fees now, taking control and actively pricing services as opposed to basing them on what they think the market is pushing,” he said.
Fee business typically generates higher revenue than transaction-based pricing. Last year, transaction revenue on assets was 0.53%, according to the report, which analyzed transaction and account data of 40,000 advisers.
Overall, average revenue on assets last year was 0.69%, the first annual increase since the beginning of the financial crisis in 2008, the report found.
An InvestmentNews survey of advisers last year backs up the rising trend. About 31% of advisers surveyed said they had made changes to fees in the past two years. Of those who adjusted fees, 73% raised their fees and 27% lowered charges, according to the
2014 InvestmentNews Financial Performance Study of Advisory Firms.
“The trend towards an increasing proportion of an adviser's portfolio being fee-based and increased fee transparency has put downward pressure on fees,” said Kendra Thompson, leader of Accenture's wealth and asset management practice for North America. However, advisers are realizing that doesn't have to translate to an outright fee reduction.
Advisers today have access to more pricing analytics than ever before and are getting smarter about using price optimization to generate more revenue from existing clients, she said.
For instance, advisers can identify less profitable clients, or those who aren't paying enough for what they are getting from the firm. Adjusting fees is one option for advisers; they also can alter client minimums, increase or decrease the level of service they are offering, or make other changes to the value proposition, she said.
In other good news for the advisory industry, last year client retention rates increased slightly, and average adviser revenue rose 13%, to $655,000, the PriceMetrix report found. Additionally, average adviser assets grew 8% from the previous year, to $97 million in 2014.
The average number of clients that advisers work with fell about 4% to 150 last year, while the assets of the average client increased 12% year over year, to $628,000, the data found.
“Advisers are focusing on a narrower set of more-affluent clients,” Mr. Kennedy said. “It's a positive sign for advisers.”
The rise in the number of automated advice platforms may be a factor in advisers' successfully ridding their books of smaller accounts, he said.
“It helps advisers say goodbye to those clients, because there are viable service alternatives for them to send smaller investors [to],” Mr. Kennedy said, noting some firms are developing their own digital platforms for investors with fewer assets.
Of course, not all advisers are sharing in the success.
About 25% of advisers suffered production declines of at least 15% last year, the report found. That group included advisers with mostly transaction-based business and advisers who had been in the industry the longest, Mr. Kennedy said.
One troubling sign for the entire industry is that the proportion of new clients under age 45 has remained at 23% since 2011. A separate PriceMetrix report issued last month showed that advisers with a significant portion of clients under age 45 grow at nearly twice the annual rate as advisers who serve older clients.
