Fee Pressure Leads RIAs to Experiment

How low is too low? That’s a question more and more RIAs are grappling with as they test new pricing models.

(Paul Yeung/Bloomberg)

(Paul Yeung/Bloomberg)

While asset managers have long grappled with ever lower fees, RIAs have held fees relatively steady for several years.

However, with fierce competition from all fronts – broker dealers, digital investment platforms, and larger portfolio management firms among them – RIA decision makers are increasingly scrutinizing their practice pricing models.

The average annual investment advisory fee last year was 0.95%, or 1.22% in total, according to a 2018 study by RIA in a Box. That’s down from 0.99% in 2016, as more advisory firms turn to passive investment management models, which are less expensive to run, according to the report.

In dollar terms, the fee spread is considerably more meaningful for some RIAs. For an RIA with $100 million under management, the difference between charging 0.95% and 1.22% would be $270,000 in revenue.

RIAs derive roughly 90% of their revenue from asset-based fees.

“A few years back we unilaterally lowered all of our fees without even asking our clients,” says Holmes Osborne, principal at Osborne Global Investors (OGI), in Odessa, Missouri.

No OGI client pays over 1%, Osborne says, and that trend really is an industry-wide concern.

“That is the absolute highest fee,” he says. “One of these days we’re going to come into a very low return environment and a lot of advisers are going to get pushed out of the business. Most advisors are indistinguishable from an index fund. This is why we do our own research and make our own investments.”

Others agree, adding that flexibility and transparency are emerging client cost priorities.

Jeffrey Burg, founding partner at Dobrusin Burg, a full-service financial advisory firm in Phoenix, Ariz., says he has seen every type of advisory practice pricing model from flat fees to hourly to assets under management (AUM) based pricing and everything in between.

“If you are solely providing and billing for investment management, it will be a race to the bottom on pricing,” Burg says. “This is happening already, as SoFi has released a zero-fee exchange-traded fund and Salt Financial recently received SEC approval for a negative-free ETF, although that negative fee is temporary in nature.”

Burg believes that advisors who are providing services beyond investment management can and should charge for these services, but they must make their clients aware of pricing models. “We have found that a competitive asset-based fee for investment management, plus recurring hard dollar fees for planning or other consulting services has been the best approach,” he says.

That pricing model seems to be working for Burg and his practice and others are trying it. Charles Schwab introduced a similar program earlier this year, allowing clients to pay a one-time planning fee of $300 and then a monthly $30 advisory fee thereafter.

“More often than not, when a new client joins our firm, they have no idea of exactly what they were paying in their prior relationship,” he says. “Clients appreciate seeing competitive asset management fees and the hard dollar fees assign a specific value to the services we are providing beyond asset management.”

That’s why a standard model of hard dollars for planning or consulting plus a competitive AUM-based fee for investment management has resonated, Burg says.

“Our clients like knowing how much they are paying for specific services,” he notes. “Imagine receiving an invoice from a caterer that just had one line that said “food” followed by a price – that likely wouldn’t be acceptable.”

Other financial advisory firm owners say that the RIA industry is facing a positioning challenge, and that contributes to an imbalance over pricing models.

“The future really is now for RIA industry,” says Rick Lear, founder and chief investment officer at Lear Investment Management in Dallas, Tex. “The great challenge facing most RIAs is that they don’t focus on investment returns.”

The focus has been on financial planning and then expressing the generic asset allocation with ETFs, Lear notes. “Thus, pricing is an issue as advice and investment portfolio services alone do not help the customer achieve their investment goals,” he says.

Lear Investment Management currently charges a 1% to clients and has considered higher fees. But to go higher with fees, RIAs will have to “commit to deep research and focus on getting investment returns above the index models,” Lear says.

“Investment performance is a topic many RIAs do not want to discuss,” Lear says. “Instead, firms hide with financial planning. The RIA model is often focused on how to limit costs to the firm and take the easy path.”

Most advisors want to play golf at three o’clock as opposed to doing the very difficult task of deep research, a service which justifies higher fees, Lear argues.

“This is more difficult for newly independent advisors, since there is no longer a large research staff and compliance office of a large firm supporting them,” he notes.

Correction: A previous version of this story overstated the difference in revenue generated when an RIA with $100 million under management charges 0.95% compared to 1.22%.

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