Financial advisers might not feel the increased pressure on fees this year, or next, but it is coming, according to the 2016 Fidelity RIA Benchmarking study.
Factoring in the increased pressure from realities such as the rapid growth of low-cost robo-platforms, as well as shrinking organic asset growth rates, the bottom line is that registered investment advisers will need to adjust pricing models and services in order to survive.
According to the survey findings, only 9% of RIAs said changing their pricing structure was a strategic focus for their firm. This despite increasing data showing fee pressure is on the horizon.
For example, the study found that median RIA firm revenue yield fell to 69 basis points last year from between 72 and 73 basis points over the prior four years. And organic growth, meaning new assets into a firm, dropped to 6.7%, which is the lowest level in five years.
The findings are in sync with the
InvestmentNews 2016 Financial Performance Study, which showed 8% revenue growth last year, down from 15% in 2014 and 18% in 2013.
“Many firms do not appear to be changing their approach to pricing, potentially hindering their ability to grow in the years to come,” said David Canter, executive vice president for practice management and consulting at Fidelity Clearing & Custody Solutions.
As Mr. Canter explained it, advisers are breathing a “sigh of relief” that the pricing pressure isn't yet at their doorstep, but there might be a lot of denial out there among RIAs.
“The outlook is that it's still a great business to be in, revenues can be defended and margins are strong,” he said. “There is a sigh of relief that fee pressure isn't coming tomorrow or next year, but we've been very vocal that we are expecting price changes and margin compression on the horizon. The future-ready business will need to scale systems and technology to survive.”
The survey, which was conducted in early summer and included 402 RIA firms, found that 44% of RIAs are not concerned with the challenges of changing their pricing models because they feel they are effective as is.
Source: The 2016 Fidelity RIA Benchmarking Study
The survey also found that most firms don't recognize the
threat to fees from some of the macro industry trends.
Only 30% of respondents saw the increasing commoditization of investment management as a major driver of pricing model change. And only 20% saw the
impact of robo-platforms as potentially driving pricing model changes.
Then there is the issue of fee clarity and understanding.
Nearly three-quarters of RIAs agreed with the statement: “Our firm's pricing is simple and easily understood by our clients.”
A big problem with that self-assessment, according to Mr. Canter, is the reality of what clients are paying for and what they're receiving.
At firms that follow the common practice of bundling services for a single asset-based fee, clients often are not receiving or utilizing services that are part of the bundle.
Source: The 2016 Fidelity RIA Benchmarking Study
Source: The 2016 Fidelity RIA Benchmarking Study
For example, 97% of firms include
investment management services as part of a bundled fee, and that service is used by 100% of clients. But 88% of firms bundle philanthropic planning, which is used by just 15% of clients. Concierge services is part of the bundled fee at 82% of RIAs, but used by only 10% of clients. And trust services is bundled at 74% of RIAs, and used by just 9% of clients.
“It's the classic issue of when services are bundled and not always taken advantage of by clients it can create a value gap,” Mr. Canter said. “In the future it will have to be more transparent. But at the same time you may have to include these services to preserve your fee.”
