For the past several years, the prevailing view has been that the rising “threat” of robo-advisors and their 0.25% AUM fees would inevitably cause fee compression for financial advisors who would struggle to compete for growth.
And the latest financial advisor benchmarking study from FA Insight finds that in fact, the growth rates for financial advisory firms did fall substantially in 2015 (though they remained positive), as measured by AUM or revenue. However, this appears to be driven primarily by weak market performance in 2015; the more stable growth rate based on clients fell only slightly in 2015.
And this slight decline in client growth rates isn’t entirely surprising either, given that the benchmarking data reveals that nearly 1-in-3 advisory firms raised their prices in the past 2 years, and another 1-in-5 plan to raise their AUM fee schedule again in the next 2 years. Overall, the median advisory fee remains at 1% on the first $1,000,000 of assets – exactly where it’s been since 2009 – and the average advisory fee as a percentage of all AUM (which includes all breakpoints for larger clients) rose from 72bps in 2014 to 78bps in 2016.
On the other hand, advisory firms are also recognizing that to stay competitive, they also must do more for clients. Accordingly, the latest data reveals that firms are expanding their services for clients, hiring more professional financial planning staff, and investing heavily into their own technology, to justify their value proposition and current fee schedule… albeit at a near-term cost of overhead ratios that rose for the first time in 8 years, and a nearly 25% decline in advisor profits in 2015 (despite clients, revenue, and AUM all being up for the year).
Nonetheless, the implication is still that once advisory firms get through this reinvestment phase, that the outcome will not be the financial advisor fee compression that some have been predicting. Even after 4 years of the robo-advisor movement, a mere 5% of advisory firms report that they have any plans to cut their AUM fees at all to compete, even as robo-advisors themselves are showing signs of growth struggles. Instead, the long-term outcome appears to be that financial advisors will continue to charge substantively similar fees to what they charged in the past, but will be compelled to deliver more value than ever to justify their AUM fees, while also focusing more than ever on the need for operational efficiencies and focused marketing!
