Will product pricing pressures carry over to advisory fees?

While passive investing and the DOL fiduciary rule have contributed to investors' cost sensitivity, the advice industry has managed to stay outside the fray — so far

Nov 30, 2016 @ 1:20 pm

By Jeff Benjamin

As low-cost index funds and ETFs continue to take market share from higher-cost actively managed funds, financial advisers could soon find themselves caught up in the downward pressure on fees.

Emily Sweet, senior analyst at Cerulli Associates, said the appeal of passive investing combined with the looming Department of Labor fiduciary rule are putting costs front and center.

“This rule may result in changing investment products, vehicles or account types advisers choose for clients to alleviate any appearance of conflict of interest or negligence of their fiduciary duty to clients,” she said.

While the fee pressure has already been unfolding in the form of an ETF price war, the advice industry has so far managed to stay largely outside the fray.

According to an InvestmentNews survey of financial advisers earlier this year, the cost of fee-based advice has been holding steady, and even trending higher in some cases.

For accounts under $100,000, advisers are charging an average 1.22% of assets, which is down slightly from 1.25% in 2014.

But on the other end of the client spectrum, advisers are charging an average of 60 basis points for accounts above $25 million, which compares to an average of 57 basis points two years ago.

The survey of 222 advisers found that 26% planned to adjust fees in 2016, compared to 31% in 2014.

But more telling is that of those adjusting fees in 2016, 62% planned to raise fees.

Of those adjusting fees in 2014, 73% of advisers said they would be hiking fees.

Even at a time of increased focus on fees, the pattern of fee stability at the adviser level doesn't surprise some advisers.

“We don't seem to get any pushback on fees in our retail accounts, and in our retirement-plan accounts the pressure on fees is usually related to the product-level fees,” said Tim Holsworth, president of AHP Financial Services.

Mr. Holsworth charges 1% for retail accounts up to $1 million, at which point the asset-based fee drops to 75 basis points.

For retirement plans, he charges 25 basis points, but said he has been flexible in response to pressure from plan trustees.

Mr. Holsworth said if it came down to keeping a client's business he would likely combine cuts to his own fees with finding less-expensive investments, which he did 10 months ago when converting to ETFs for all taxable retail accounts.

“Fees are not the reason retail clients leave; at least not for us,” he said. “I think people leave because of what they think the performance should be, or maybe because they didn't like the service.”

Todd Rosenbluth, director of mutual fund and ETF research at CFRA, described the cycle of lower-cost products gaining appeal on the wave of an historic bull market for stocks, which has helped advisers hold firm on their asset-based fees.

“The ability to charge a higher price is aided by having lower-cost products,” he said. “Even an adviser that favors active management will be increasingly looking for cheaper active management as we move forward.”

In that respect, advisers could be the last layer to feel the fee pressure, but that doesn't mean they won't feel it.

“Advisers do like to talk about fees, but not with their clients,” said April Rudin, founder of the RIA marketing firm Rudin Group.

“One of the most important communications with clients is to discuss and disclose the fees,” she said. “The DOL rule gives advisers an opportunity to talk with clients about fees, which is something they should be doing regularly.”

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