Many in the broad financial advice industry expect fees advisors charge to clients for managing money and performing a variety of services to change in the next decade. But no one knows with any certainty where the potential variations in prices are heading.
Clients will continue to demand more in services from their financial advisors, resulting in a shift in pricing. That’s the financial advice industry’s broad consensus on pricing and fees at the moment.
The traditional fee by an advisor, to charge a client a percentage of assets to manage their portfolio and money, known in the industry as an asset-based fee, “is going by the wayside,” said Tammy Robbins, executive vice president, chief business development officer, Cambridge Investment Research.
Asset-based fees may be a portion of an advisor’s fee in the future, she said.
“It’s not going to be your traditional asset management” fee, Robbins said Tuesday morning in Dallas at the annual meeting of the Financial Services Institute, a trade association for independent broker-dealers. “It is going to be very different, so we have be open-minded in how financial professionals are consultative, and how they are a concierge type of service.”
Robbins spoke on a panel titled “How low will they go? Navigating price pressures.”
The fee advisors and firms in the future charge clients “may not be a percentage of assets,” Robbins said. “Personally, I don’t think it will be. It will be more like an a la carte menu of services, including financial planning, taxes, guidance on buying a car or home. We’re going to have to be open-minded.”
Financial advisors who work as independent contractors typically charge a client an annual fee in the neighborhood of 1 percent of a client’s assets. That would translate into an annual fee of $10,000 for a family with $1 million in assets.
Some firms are more expensive and others less, with advisors at large brokerage firms charging in a range of 80 basis points (0.8 percent) to 120 bps (1.2 percent) of assets to work with clients.
Broker-dealers charge clients commissions for transactions, but the retail brokerage industry has steadily shifted to asset-based fees over the past 20 years.
“We must think about net new clients, the next generation of client and how they want to be interacted with, and how they want to be serviced,” Robbins said. “We have to reinvent and think about how we are servicing that next generation of client, and then we are going to have to build our pricing around that.”
Financial advisors are currently enjoying a golden age of sorts. The broad stock market continues to trade near record highs, which means the fees that advisors charge clients also increase. And the marketplace for advisors to sell their firms, particularly RIAs that generate attractive rates of cash flow, has never been more robust.
While many broker-dealer executives don’t see the asset-based pricing model about to shift, others are concerned that a change in pricing will eventually hit and potentially erode the bottom lines of firms like broker-dealers and registered investment advisors that work with financial advisors.
Advisors charging clients other types of fees, such as a flat-fee model or a subscription-fee model, has been widely discussed in recent years but not overwhelmingly adopted.
The financial advice industry has been holding its breath for more than a decade about a potential erosion in the level of fees it charges clients. It need look no further than the adjacent mutual fund industry for proof of sudden fee erosion.
Actively managed mutual funds once dominated the asset management market for retail investors and financial advisors. Drastically cheaper, often passively managed, exchange-traded funds have eaten away at actively managed funds.
A key to stable pricing for broker-dealers and RIAs is the relationship between the advisor and the client and the firm adding services to cement that relationship, said Catherine Knopf, senior vice president of advisory sales at Osaic.
“In light of pricing in asset management, pricing compression is very real,” Knopf said. “On the advisory side, it’s less so real and that is very much do to the value proposition around it.”
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