Focus on fees: Tips from top performers

More firms will place an emphasis on creative – and strategic – changes to their overall fee structure and philosophy.

An InvestmentNews Research prediction for 2019: Despite all of the discussions around fee compression, the asset-based fee charged by most advisory firms will not change substantially this year, but we do expect that more firms will place an emphasis on creative – and strategic – changes to their overall fee structure and philosophy.

In our 2018 Study of Pricing & Profitability, we found that overall asset-based fees remained virtually unchanged, with the typical fee schedule below outlining the average and median breakpoints:

Typical independent advisory firm’s fee schedule and pricing

Client AUM levels:	Percentage of firms servicing client size:	Average advisory fee percentage on assets
		Average	Median
$100,000	73%	1.21%	1.20%
$250,000	80%	1.17%	1.06%
$500,000	92%	1.12%	1.00%
$1,000,000	98%	1.01%	1.00%
$2,000,000	95%	0.92%	0.90%
$5,000,000	86%	0.75%	0.73%
$10,000,000	68%	0.65%	0.60%
$25,000,000	49%	0.46%	0.46%

These fees are consistent with levels that InvestmentNews Research has recorded for nearly a decade. However, when digging a bit deeper into the practices of the industry’s top-performing firms, we noticed that there are some fundamental changes to fees taking place below the surface numbers.

In a new qualitative research project developed with Raymond James Financial, InvestmentNews has uncovered the stories of top firms, many of whom are making slight changes to their fees that align with their growth strategies – as opposed to reacting to external market pressures.

This is an important development in the overall evolution of fees: While advisers have not generally increased their fees, more firms have been specifically defining their ideal client types and assigning a minimum value to their services before they even begin working with a client. This is an early trend that we believe will continue to gain momentum in 2019.

Tips from Top Performers: Roof Advisory Group Location: Harrisburg, Pa. Assets: $471M

When less is more: Lowering fees can actually be an approach that leads to both short- and long-term strategic growth.

That’s the mindset at Roof Advisory Group, an InvestmentNews Best Practice Award winner and one of the top-performing firms in the independent channel over the last decade.

Recently, Roof elected to roll back both its minimum fee and minimum asset requirements – not because of pricing pressure, but because of the opportunity it sees to improve client retention and acquisition.

Specifically, Roof dropped its minimum annual fee to $5,000 per year from $7,500 and lowered its minimum asset level to $500,000 from $1 million. It also added a new breakpoint at $5M in assets and lowered its top-tier fee to a 50 basis point discount, as its client base continued to grow into that threshold Previously the higher end of its fee schedule was 60 basis points for clients with $3 million or more.

“We have very efficient client service and investment management processes, which allowed us the opportunity to serve more clients,” said Jeff Roof, president of Roof Advisory Group. “As legacy clients grow in size, we determined that adding another breakpoint was another way to leverage our efficiencies, be more competitive in our market and deepen client relationships.”

While they don’t position the new breakpoint as a loyalty discount, that is effectively the viewpoint internally and it is one that is well received by clients who have had a successful long-term relationship with Roof.

On the lower end, Roof sees an opportunity to expand in the market of individual investors who have between $500K and $1 million in assets. It’s a relatively new market for the firm, and 35% of its new clients added last year fell in that asset range.

To be clear, while the firm is using the strategy to develop its next generation of clients, Roof is rigorous in the screening process when evaluating clients with less than $1M. “We are very selective about which clients we are taking on,” said Mr. Roof. “We look for organic growth within the client relationship and want clients that have the potential to add dollars to the relationship. If that potential is not there, we may not take the client on.”

Tips from Top Performers: Phillips Financial Location: Fort Wayne, Ind. Assets: $1,031M

All Fee Cards Face Up: At Phillips Financial, “All fee cards face up” is not just a motto – it stems from the belief that success hinges on transparency and continually working in the best interests of clients. That’s why the firm recently decreased fees – it was determined that small transaction costs being paid by the firm should be passed to the client, prompting them to lower slightly, by 1 to 2 bps across the board to make those costs up to clients.

That same drive for transparency is what motivates them to charge a flat fee schedule, which varies inversely based on client assets, rather than a blended fee rate based on tiered breakpoints within their assets – in other words, their clients don’t pay one percentage on their first $1 million, another on the next $1 million. This has made it easier to for clients to more readily digest how they’re being charged.

Similar to Roof Advisory, they have developed a strategy for bringing accumulator clients to the firm baked into their fee structures. At Phillips, clients can refer assets from qualifying family members, who in turn receive their own service, but pay fees based on the sum of their family’s wealth – a multi-generational strategy built into their fee program. Additionally, the firm offers a white label robo-advisory service to smaller clients.

Core to Phillips’ approach is the belief that the industry broadly has room to more closely align the value delivered with services provided, and that industry-wide change is coming down the road. And the firm is always seeking ways to nudge their model in that prevailing direction.