At the beginning of the fee revolution in the 1990s, 2% fees on top of the underlying mutual fund costs were not unusual. Since then, that pricing has steadily collapsed, and today, most advisers charge around 1%, with many using lower-cost institutional and exchange-traded-fund shares. Clients are saving as much as 60% compared with what they were paying just 10 years ago.
In my opinion, this trend of declining prices hasn't ended. In fact, it is quite likely that for a re-balanced asset allocation strategy, we are headed to the 0.5% fee zone. This will lead to very important decisions that all advisers will have to make if they are going to survive and thrive in the future.
First, do they want to compete on price or on service? In the past, the full-service brokerage firms were quite expensive and loaded with proprietary products. Independent advisers were charging around 1% from the get-go; they were the low-priced leader and thus were insulated from the declining pricing over the past 10 years or more.
But things have changed. The majority of large brokerage firms are now quite competitive with independent firms. We now have super-low-priced competitors, including the do-it-yourself and online models, some priced as low as 0.1%, and the custodians are marketing wrap accounts serviced by advisers (admittedly unseasoned) at 0.3% to 0.5%. This pressure from below is new to our industry. Independent advisers today who focus on managed portfolios will need to achieve scale by serving more clients and assets, while cutting costs.
It's a massive challenge.
The alternative is to charge more, but to do that, advisers need to differentiate their services in explicit ways. A small group of advisers might be able to offer truly unique investment solutions for which they can charge a premium price (think hedge funds or high-alpha managers).
But for the majority of the industry, I believe the next big wave will be to start charging for advice — yes, that thing most of us have been giving away for free forever.
What exactly do I mean by advice? I mean taking care of clients' entire lives, not just their investments. Helping clients understand and make smart decisions on every financial matter beyond their investing, and doing it in a way that feels as real and tangible as the portfolio you manage for them — advice so valuable they are happy to pay for it, delivered in a client-friendly way. Imagine a client statement that expands beyond performance to include a current balance sheet, a live budget, a dynamic financial plan and a list of client priorities delivered anytime on multiple media platforms seamlessly.
This is the future of advice, and advisers will have to make big investments in their client experience, services, staff and training. They will need to think about their brands and adapt everything to their new promise. This will be complex and expensive, and the transition will certainly affect profit margins in the short term. But in the longer term, I know that this evolution is how some advisers will survive and thrive, while others will struggle. The trends are unstoppable — the next big wave is here.
Joe Duran is chief executive of United Capital and the author of “The Money Code: Improve Your Entire Financial Life Right Now” (Greenleaf Book Group Press, 2013).