The Fee Pressure Specter Is Real

The time for RIAs to act is now, says Jon Foster, president and CEO of Angeles Wealth Management.

Jon Foster (Courtesy photo)

Jon Foster

(Courtesy photo)

RIAs must get a firm handle on their expenses — or risk oblivion, argues Jon Foster, president and CEO of Angeles Wealth Management.

Fixed costs are rising and the inability to charge more (or pressure to charge less) would especially hurt RIAs that don’t effectively manage their costs, particularly those managing less than $200 million, says Foster, whose firm has offices in Santa Monica, Calif. and New York City.

While the prospect of falling fees has long been debated, the E*Trade and Carson Wealth veteran sees the prospect of lower fees as inevitable and tells advice-seekers it’s imperative to address.

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Foster, whose firm primarily serves high-net-worth individuals, families, trusts, estates, and related business and philanthropic entities, explained his logic to RIA Intel.

While many in wealth management are relatively complacent about the fees they charge, you’re ringing the alarm over potential compression. Why should RIAs be so concerned?

If you run an RIA without the expectation that you’re going to have fee pressure, I think that you’ve got your head in the sand as this has happened everywhere else. So, to date, I think wealth management firms have experienced fee compression, but it’s all been at the expense of asset management.

We’ve all bought more low-cost index funds and really squeezed down that part of the fee scale. And anybody who manages dedicated, fixed income assets has certainly experienced fee compression because clients will call up and say ‘Hey, the U.S. charges one and a half percent. I can’t pay you 60 basis points for fixed income. It’s too high.’

It’s just a question of time. In an environment where you have double-digit returns you can get away with the 1% starting fee but I don’t think that’s the future. When I speak to colleagues in wealth management, they may not have felt top-line fee compression, but they certainly have felt the deliverables go up. The expectations go up. So, their costs have gone up and it’s not just talent costs.

How can firms better deal with these rising costs?

For a lot of private client RIAs, their advisor compensation is tied to revenues, but not the entire expense stack is tied to revenues. So, if you have asset management personnel, you have service people, you have clerical people, etc. All those folks would like to earn more over time and saying to operations people, ‘Sorry, I have to give you a pay cut because revenues are down.’ It doesn’t fly. Their talent is in high demand. They’ll go somewhere else. I’ll hire them. I’m constantly looking for talent. So, I think that a lot will have to be scale, in order to survive this, and a lot has to be a really aggressive use of modern technology.

Will there be a catalyst for lower fees or do you expect more of a gradual process?

I think the good news is it’s like falling off the cliff in slow motion. Hopefully you have the chance to make some changes on the way down and keep yourself from hitting the bottom. We’re not going to walk in one day and it’s the beginning of negotiated rates in the brokerage business where one day stock commissions were 50 cents and the next day they were 5 cents. It’s not like that. It’s a slow compression. It’s like you put a frog in a pot of water and turn on the heat and they don’t jump out because it gets hot slowly. It’s going to happen. They have to be ready. A lot of it can be client driven or a client starts to question the value of what you’re providing them with.

And I have yet to find a client who responds positively to when we say, ‘Well, sir, we give you excellent service.’ That’s an expectation, right? People don’t think they pay for service. They believe that they deserve service. So, it’s obviously going to be investment performance. It could be top-notch financial planning. It could be institutional quality access to investments. Having a great chief investment officer who does good asset allocation. It’s probably all of the above.

And reporting has gotten more and more expensive. It used to be that you could get quarterly reports 45 days after the end of the quarter. People didn’t blink. Now, let’s see if we don’t get our reports out in 10 days at the end of the quarter. I’m getting itchy. Because it’s just too slow. Clients expect things on a really timely basis and they should get it. And all those things are fixed costs. They don’t get cheaper when revenues go down.

It’s almost an arms race of expectations. Everyone has to keep up with the others at a certain level.

Well in the world of there’s no original thought left I’m going to totally plagiarize your concept of being an arms race. I’m going to use that from now on. That’s exactly correct. And so if you’re a small RIA, you’re a small team and you’re a smart team. You’ve done well for 20 years, but all of a sudden the deliverables are going up all around you and the investment world is getting more and more difficult, which it certainly is.

Tell me more about spending decisions and investment amid an expected fall in fees.

You have decisions to make. Do you staff up or find things you can outsource where you can plug in people or services that are better at certain things than you are. I think that’s where the trend is going. And that’s why you’ve seen such tremendous growth in companies like Addepar, Envestnet, Tamarac and other TAMPs. And you’ve got new businesses like Vise that are quite interesting. There are all kinds of tools to help independent advisors supplement their model without having to add more bodies.

Then the risk is that white label is not your label. So there are things that you have to do to practice good spin control. So if you don’t manufacture own investment process, that can be tricky. How will clients respond to that? ‘Joe, I’m not paying you, I’m paying for XYZ Corp.’s model or TAMP.’ So how you message that is tricky. Operational stuff’s easy, right? Reporting software is easy. Salesforce, CRM stuff is easy because that all just makes it better.

I imagine that outsourcing will often get better results but can be a harder sell to clients.

It’s all about the value prop. Every time we run quarterly bills, I review everything before it goes out. I’m the last look. I look down and I see...we have large clients and I see the bills that we’re sending out. And for each one I ask, are we earning our money? That’s really important to me because the clients are probably looking at that too. And if you wait for them to question whether you’re earning money, it’s too late. If you get a phone call from a client saying ‘Hi, Jon, we haven’t spoken for a while. And I was wondering what you’re thinking about the market?’ I’m dead, it’s too late.

You have to be proactive. One of my colleagues from the institutional side of our business popped in to see me last March 2020, because he wanted to know what the pulse of the private client market was. Were they panicking? And they asked, ‘are you getting lots of phone calls?’ And I said, well, I don’t know because we called everybody. That’s when you proactively reach out. And it’s okay to call a client and say, ‘I don’t have all the answers,’ but you need to say, ‘I’m thinking about you and I’m looking for those answers.’

With stocks near record highs, there’s a lot of money sloshing around. To what extent has this made it easier for firms to justify what they charge?

Nobody’s complaining about their fees when they’re making a bunch of money. But it’s the same concept as someone who has a pure fixed income managed account. They’re questioning the fees that are charged because their debt is so small. So it’s just rates of returns. High returns mask a cost problem.

Anybody can go to Vanguard and get a pretty darn good asset allocation model designed by headquarters. You don’t get to meet with a person, but you get Vanguard funds. And I think they charge like 35 basis points. So Vanguard has set the cost of basically low touch mathematically correct asset allocation, but without a lot of personal touch.

So, that’s the benchmark. So if you’re charging 50 basis points, 75 or a hundred, some people that are charging over a hundred basis points, there better be a package of extreme value that you provide there. Or you’re going to get marginalized. It can be done. It could be planning, it could be estate planning, could be tax advice, could be generational advice, could be other pure services. It could be access to really exceptional investment products. But you’ve got to think about the value prop.

What are some of the best ways firms can identify their value proposition?

You’ve got to look in the mirror to figure out what you’re good at. After you figure what you’re good at, figure out the things that clients need and then go get them. That’s where outsourcing comes in. We are really, really good at investments. And that’s because we had the advantage of the association with our institutional affiliate that’s advising on a tremendous amount of institutional non-profit endowments, foundation assets, etc. And so we get access to a lot of really good ideas. So I think we’ve got that nailed. And then I look at the other things that have to go in, but I wouldn’t create financial planning offering on an Excel spreadsheet. I’m going to go buy that software. I may go try to find the best software and I may try to do the best job I can on price of that, but I’ll pay whatever I have to pay to get it.

When it comes to reporting, there are great reporting companies out there. I’m not going to go create one. In the old days, people used to do their own reports. That doesn’t work anymore. And you pay what you have to pay. So some firms offer in-house tax preparation, tax advice, etc. We don’t. We think that I would never be able to hire the best tax advice to come in-house. I’m going to go find those firms. You have to figure out all the different things the client need and what’s the package of value. And even if you feel good about the value you’re providing, try to take your client’s pulse and see if they feel the same, because you’re getting priced every day.

Where do you see value in the market?

We have a sort of strategic overlay in everything that we do, and that will change with different opportunities in the market. So for example, until about last fall we were a cautiously overweight U.S. large cap growth. And now, we’ve tried to move towards being able to take advantage of this, to value and the rebound trade where there can be a little bit more of a neutral feel and a little more value focus. However, it’s hard to get from A to B if you have clients that have huge gains because of taxes. So, I tell every client that the first day you show up, you show up with a $10 million all cash account and I’m the happiest person on earth.

And then later after you have a lot of embedded gains, before I was piloting a speed boat for you, now I’m trying to turn a barge. It’s very, very difficult. So, everything is an after-tax consideration, but we think right now the rebound is real. We think that the inflation we’re seeing right now, there’s no guarantee that that’s long-term. That just may be on the rebound trade because everything’s in the wrong place. There aren’t enough chips. People cut back when they should have not cut back. If you go to Hertz, you can’t get a rental car, a lot of stuff, just repositioning.

So, you think the inflation is more transitory in nature? Treasury yields support that notion.

We’re keeping an eye on it because the one thing I’ve learned in this business is that I’m prepared to be wrong a lot.

And you prefer value over growth?

If I had fresh money we might be a little overweight value but getting there on legacy accounts is harder because of the embedded gains.

How do you see U.S. stocks compared to international stocks?

We’re a dedicated global investor. I believe the U.S. is about 55% of the global stock market. So, we’re definitely overweight U.S. And we’ve been underweight Europe for a long time, but we’re actually now more neutral. We think Europe is a little behind on the recovery trade. But we think that they’re going to catch up. The long-term prospects of Europe were still a little bit tough. There’s no question. The real issue is what happens in China and China is sort of an enigma because you obviously have tremendous growth potential but you have political issues and other factors to consider.

Is there anything else that you feel strongly about that we haven’t touched on yet?

I think the roll ups and aggregators are sort of foretelling the future. And what that activity is saying is that a small, independent RIA better have a plan to not be small. Because as fee compression and costs go up, it gets tougher and tougher for you to maintain your business and continue to attract the talent you need to be successful as a small independent. And I think about that all the time. It used to be that you could have a hundred million dollars in assets and have a really smart small team and you could make a good living at it. But I don’t know if that’s going to be possible in five years when you do get some fee compression, because expenses are not all variable. If you have a key person and you say to them, “sorry, I have to give you a pay cut,’ I’m going to hire them.

So, for smaller firms, the big question is to buy or be bought?

I think it’s buy or be bought in absence of having true strong organic growth because the key to everything is organic growth. We’ve been fortunate that our organic growth has been so strong that we don’t have to do anything if we don’t want to. A lot of M&A activity is done out of desperation. You’ll have two slow growth firms try to merge to try to create some kind of scale. But as a wise man once told me two dogs don’t make a cat.

You see that often in corporate America. Top execs can make windfalls on ill-conceived mergers regardless of their eventual fate…What drives you to stay in the business?

I spend a lot of time talking to other RIAs because I’ve met so many people from being in this business for longer than I care to share. I really care about my colleagues in the RIA industry. So I think we’re all on a quest to provide true fiduciary advice to clients and try to extinguish the brokerage model from the world. I believe in the fiduciary model, not the suitability model.

So I’m always there to help other RIAs in terms of helping them think through this process, that I always volunteer my time to do that and am willing to talk to them. And because I think that there’s lot of great people that I want to see them all survive, and I want to see their culture survive. The handwriting is on the wall if you haven’t reached scale. And generally the best way to reach scale is by organic growth. In absence of that throw your hat in with other good people. And hopefully one and one makes three.

How do you see organic growth primarily occurring in the future? And how has the pandemic affected the way that RIAs pursue it?

The first thing I ask other RIA leaders if they ask me for advice on this is ‘what’s your elevator pitch?’ And if they can’t give me their elevator pitch in about two sentences or in 10 floors of the elevator, they got to go back to the drawing board. Because you have to be able to articulate who you are and what your value prop is. And it could be any number of things. It has to be something that’s true. Something that you believe in. Something that you could deliver. And if there are any number of ways to do it. It’s been interesting like our business, March 2020, we were wondering what’s going to happen to our world like everybody else.

Then by the end of the year, we had 55% revenue growth, 2020 over 2019. I’m still shocked by it, in some ways almost embarrassed by it. But I think what happened for us is a lot of seeds that we planted pre pandemic when clients or prospects had time at home to actually look at their portfolio and listened to what we said.

So, that was really not expected by us, but we’re actually very happy about it. So I think for organic growth the key is having a good story and being really good at telling it. And it can be any number of things. You can be a great money manager. You can be a great financial planner. You can be really good at connecting to people about their family or their philanthropic issues. You figure out what you’re good at, manufacture that in the stuff that’s necessary to have a good firm. Make sure you go buy it.

And being seen as honest and a person of integrity.

It’s also passion for what you do. I think I’m practically a pretty lousy salesman, but I have such strong belief that we’re providing great value for prospective clients. To me, I’m an evangelist. I’m just so confident that what I have to offer is probably better than what they have, that I feel like I’m doing them a favor.

You have to have confidence in what you do. And you have to like to tell that story. You don’t have to be a natural salesman who could sell anything, but you have to be able to have confidence in what you build to be able to sell it because you believe in it.

I think conviction is arguably the best sales tool. People tangibly feel it. It’s more about authenticity.

A hundred percent correct. But you also have to get out from under your rock and go see people. That’s what I tell my folks here who are client facing or new business facing. Have coffee, lunch, or Zoom calls with three people a day and check in with them. Like ‘Hi Joe, we haven’t spoken for a while. Let’s grab a cup of coffee and catch up.’ It’s just connecting, hearing about their family and what they’re doing.

And don’t let it feel like it’s a sales call. You don’t want them to say, ‘Oh God, here comes this guy again trying to pitch me for business.’ You have to have real interest in people. And you check in and see how they’re doing and ask them what they’re doing. And you tell them what you’re doing. And your passion comes through. If you do that three times a day, 15 times a week. That’s a ton of times for a year where you get shots of the plate. That will get things done. If you get a chance to talk to 750 people a year, you will get new business.

A similar dynamic applies to networking. You don’t reach out to people when you need a job. You reach out when you don’t want anything.

I think it also depends on what type of person you are. It’s like, I generally like talking to people and hearing what they’re doing. Some people say, ‘I don’t want to pick up the phone and say hello to people or chat.’ That’s going to be tough for your business. You’re going to have to break that or bring somebody else who likes to do that. But I always find those things to be a pleasure, sitting down with a sphere of influence and not asking them for their business, but just asking what’s happening in their life, or even asking them for advice. It’s incredibly helpful. And it’s fun.

The best sales pitch is often not a pitch. It’s kind of counter-intuitive but it speaks to human nature, I think.

Oh, absolutely. The expression that I teach everybody here is ‘it’s tell, don’t sell.’

There you go. Thanks so much, Jon.

Greg Bartalos (@gregorianchance) is editor of New York City-based RIA Intel.

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