Registered investment advisers are starting to succumb to pressures from robo platforms by cutting fees and embracing their own digital platforms, according to the 2017 Fidelity RIA Benchmarking Study.
The report, released Monday morning by Fidelity Clearing & Custody Solutions, shows pressure on client growth and revenue yield, while profit margins are holding steady at around 19%.
While published fees have remained at 1% for the first $1 million in client assets since 2011, the study found a trend toward fee-discounting by more than 60% of RIAs.
The research found a median fee gap between stated and actual fees of 21 basis points, with actual fees charged across all clients averaging around 64 basis points.
The
trend toward discounted pricing is coming at a time when RIA productivity is near its highest level in five years, with assets under management per client remaining steady at $1.1 million, according to the report.
Client growth, at 5%, hit its lowest level in five years, while the number of clients per adviser, at 71, hit its highest level in five years.
Meanwhile, annual revenue per adviser dropped to $538,00, down from $561,000 a year earlier.
Rush Benton, senior director of strategic wealth at CAPTRUST, said fee pressure has been part of the conversation in the financial advice space for at least 25 years, but he still believes it's more talk than reality at most firms.
However, he acknowledges RIAs have been "doing more for the same fees," which is a version of
fee pressure.
"There's always been discounting, but perhaps now people are a little more willing to admit they do discount," Mr. Benton said. "And as accounts get larger there is more willingness to discount, and at this point in the market cycle, a lot of accounts have gotten larger."
UNBUNDLING FEES
One thing Mr. Benton does expect more of is a trend toward unbundling of fees, especially when it comes to separating assets under management from more holistic financial planning services.
Fidelity's research identified a clear pattern of unbundling services, which it attributes to the increased popularity of
low-cost robo-advice platforms.
The report highlights 10 separate service offerings ranging from investment management to tax planning to concierge services.
"Most firms still charge on an assets-under-management formula, but we are seeing a trend toward unbundling," said David Canter, head of Fidelity's RIA segment.
"While discounting can contribute to revenue yield erosion, some erosion can be expected against the backdrop of new strategies increasing scale and driving down the cost of business," he added.
"With revenue and client growth dropping, RIA firm leaders will have to ensure that they make up in volume what they are discounting in fees. But discounting could signal that RIAs are bridging to the practice of unbundled fee structures, which may help to attract fee-sensitive clients, align services with value and protect against the commoditization of investment management."
Each subcategory listed in the report shows a decrease, from 2015 to 2016, in the services being included as part of an overall advisory fee.
"The unbundling is driven by the robos providing asset management for a very low fee, and that makes it apparent to clients that the asset management is the lowest value provided to them," said Mr. Benton. "We're not unbundling fees yet, but I think that could happen down the road. As an industry, we need to get better at articulating the value of the comprehensive planning."
FEE JUSTIFICATION
Tim Holsworth, president of AHP Financial Services, said he will lower fees for some 401(k) plan advisory services, but fee pressure in general "is not an issue for us."
"I am hopeful the value-added benefits of a free financial plan, risk scores, and Morningstar reporting will help justify our fee going forward," he added. "Robo advice is a total non-event for us, at least for now. If clients wanted to do investment management themselves, they would."
Mr. Holsworth's perspective on robo advice is in line with Fidelity's research, which shows that only 8% of RIAs are currently using digital advice, while 33% of firms are considering implementing digital advice.
On that finding, Mr. Canter cried foul.
"I'm shocked it's only 33%; I think it should be 100%," he said.
However, he is optimistic that the RIA space will continue to embrace the benefits of launching their own robo platforms to handle investment management.
"This is not part of the research, but I'd say over the next year we're going to see a doubling of the adoption of digital platforms," he said. "Next year at this time we'll be talking about 16% of firms using digital platforms."
