Uncovering the nuances to the headline trends of our industry

Uncovering the nuances to the headline trends of our industry
As InvestmentNews opens its annual benchmarking survey for this year, we will be looking to the data for clues on inflation’s impact on wages and how it has translated to advisory practices.
MAR 20, 2023

When I first arrived at InvestmentNews a little over three years ago, I did what anyone taking in the landscape of a new industry might: Start with the headlines.

Back in late 2019, one of the more persistent headlines in wealth management was fee compression — the idea that, with a bevy of major discount brokerages having just completed their long descent to zero-commission trading, financial advisors across the industry would begin to see a crunch on their own fees.

So naturally, when we fielded our Advisor Benchmarking Study a few months later, we might have expected the data to show advisors adjusting their fee schedules in a scramble to stay competitive. But while those of us in the magazine business certainly like a compelling headline, it turned out the story was quite a bit more complicated, and it goes to the heart of why we engage in research on the advisory industry.

TRACKING THE METRICS

That year, nearly a quarter (24%) of firms adjusted their fee schedules, but not necessarily in the direction we anticipated. Of the firms that made a change, 68% raised their fees. And digging deeper, we found only 63% of these firms made changes across their schedule; many adjusted only for a particular client segment or on a case-by-case basis.

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Revenue yield on assets under management, a metric that tracks revenue as a percentage of assets managed, did decline over the latter half of the last decade, falling to 0.71% in 2019 from 0.80% in 2015 and suggesting a drop in actual fees charged even as published fee schedules remained roughly the same. But also between those years, the share of firms serving $1 million-plus relationships rose to 97% from 87%.

Larger clients, of course, are more economical to serve and typically pay a lower fee in percentage terms. Bigger relationships drove down revenue yield but fueled cumulative growth of 27% for the average firm over that four-year span.

So, were advisors facing a fee crunch? Yes, but a small minority of them. Were average AUM fees declining? Yes, but partly because firms were trading up to clients who were more lucrative overall. Was 2019 the beginning of a new pricing war among independent advisory firms? Probably not — revenue yields have since ticked back up and fee adjustments have become even rarer in more recent studies.

And in any case, fee pressures were not holding the industry back from healthy growth.

The point is not that fee compression wasn’t real or that advisors could be complacent about the fees they were charging. It’s that there were nuances to the headline trend that required data specific to our industry to uncover, and that even predictions based on sound economic assumptions can play out very differently on the ground.

THIS YEAR’S STORY

As we open our annual benchmarking survey for this year, the big headline is inflation. After years of tracking relatively flat advisory compensation in our studies, we will be looking to the data for clues to how firms are handling pay amid rising living costs.

There will be plenty of sources for information on inflation’s impact on wages generally. Already, for example, we know that at a high level, inflation pushed wages up nationwide in 2022.

But how has that translated to advisory practices, with their particular incentive structures, high level of owner operation and exposure to market-based revenue fluctuations? Participants in the survey will be among the first to find out later this year.

The only thing we can promise is that the answer will be a little more complicated than the headline trend.

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