Registered investment advisers last year reduced their asset management fees to the lowest level in 10 years, according to Rydex/SGI's annual Advisor Benchmarking Study.
And though asset-based fees continue to be advisers' main source of revenue, more RIAs are willing to accept clients on a project basis and to charge them by the hour, according to the study.
The median fee charged by the 561 firms surveyed by Rydex fell to 0.90% of average assets under management last year, from 1.11% in 2007. The respective numbers represent the highest and lowest levels recorded since the benchmarking study was first conducted in 1999, attesting to the dramatic shift in adviser behavior and profitability caused by the market crisis last year.
"From 2002 to 2007, everything was about growth — in clients, revenues, profits and assets under management," said Maya Ivanova, the senior market research manager at Security Global Investors, who coordinated the study. "Now it's about, ‘how do I keep what have?' and ‘how do I build loyalty with my existing clients?'"
Ms. Ivanova said that it appears that more advisers are willing to charge clients on an hourly basis than in recent years. That reflects the difficulty of getting referrals from existing clients, let alone retaining existing clients. The average adviser in the survey lost 15% of his or her clients last year, and just 20% of new clients came from passive referrals, down from 45% in 2007.
Of the 25% of survey respondents who said that they charged separate fees for planning and asset management, 54% said that they charged an hourly rate to some clients.
Advisers also dropped their account size minimums for the first time in seven years, to a median of $250,000, down 41%, from the 2007 survey high of $425,000. In another sign of falling fortunes, the median number of high-net-worth clients —those with at least $1 million of assets — fell to 20% of respondents' client base last year, from 28% in 2007.
Overall, advisers last year lost about two years of asset-under-management growth, with assets falling to a median of $136 million, from $155 million in 2007, while revenue fell to a median of $1.4 million, from $1.7 million.
Despite the radical changes in the investment environment of the past year-and-a-half and the waning confidence of clients, 63% of respondents said that they aren't making changes to their firms' operations or compensation structure.
"I thought they would have been more proactive and make more efforts to make changes," Ms. Ivanova said. "Those who make efforts to do that will be the winners."
Almost 100% of respondents said that they have increased client outreach since the summer of 2008, but just 36% have a formal marketing plan and only about half conduct quarterly one-on-one meetings and annual client reviews. The median number of clients among survey respondents fell 15%, to 304 per firm from 356 clients in 2007.
Advisers who said that they spend 60% or more of their time meeting with clients in person were eight times more profitable than those who said that they devote 30% of their time or less to client interaction, Ms. Ivanova said.
In managing their own businesses, 14% of respondents said that they reduced the compensation of their principals, while 15% said that they laid off administrative and support staff. Median expenses fell 10%, to $1.1 million last year, while assets under management dropped 12% and median revenue dropped 16% to $1.4 million among survey respondents.
RIAs have been more active in portfolio management, with 65% saying that they changed their asset allocation approaches last year. Mutual funds remained the most popular investment product among advisers in the survey, but the 37% who said that they put clients in funds was down sharply from 48% in 2007.
One out of three respondents said that they are increasing allocations to alternative investments to provide adequate diversification to clients. The survey didn't ask them to define alternatives.
The alternatives trend jibes with that of a new survey from Fidelity Investments, which found that independent advisers plan to increase the percentage of their clients' portfolios in nontraditional investments to 14%, on average, from 11%, over the next year. Private, non-exchange-traded real estate investment trusts and managed futures were the most popular alternative vehicles cited by the Fidelity survey participants.
Rydex/SGI, a unit of Security Global Investors, said that small firms dominated its RIA benchmarking survey.
Sixty-two percent of respondents said that they work at firms with less than $100 million under management, including 37% under $50 million. Another 29% of respondents said that they work at firms that managed client assets of $100 million to $200 million.
The Rydex survey was conducted between February and May. The 65-page benchmarking study, titled “An Industry Transformed,” is available free of charge from the firm.