What fee compression?

While fee compression is viewed as ubiquitous around the financial services industry, most advisors aren’t feeling any pressure to reduce their fees, according to Pershing Advisor Solutions.

“Custodians, product issuers and manufacturers, investment managers, fintech firms—every level of the financial supply chain is experiencing severe fee compression, except for advisors and the wealth management fee,” said Gabriel Garcia, managing director and head of relationship management and consulting at BNY Mellon-Pershing “There is a very de minimis population actually lowering their pricing.”

In an informal survey taken from 31 respondents among the attendees at this years’ Pershing Advisor Solutions’ Elite Advisor Summit in Dana Point, Calif. March 7 to March 9, 58 percent said they haven’t heard any requests for lower fees from their clients.

While the value of investment management and custodial services has been significantly altered by technology, the value of sound financial advice has remained relatively stable, said Garcia.

“Barring a few spikes involving the timing of asset flows, advisors have been reporting revenues in a tight range of 75 to 79 basis points year-in and year-out since I started consulting with RIAs in 2002,” he said. “I call fee compression for financial advisors a myth.”

In the Pershing survey, 84 percent of the attendees said they did not change their pricing at all in 2017. In fact, 10 percent of the attendees reported increasing their pricing.

As yet, the impact of advisors offering services based on alternate pay structures like retainers, hourly fees and a menu of services at fixed prices has not been felt throughout the industry, said Garcia, who noted that about 80 percent of advisors still use the traditional AUM-based pricing scheme.

“We are seeing many new entrants in the industry going to a strictly flat fee negotiated every year or under contract, and some folks in the multifamily office segment are expanding services and charging project-based fees for additional services,” he said. “It’s still an insignificant amount in the greater scheme of revenues.”

The key to maintaining traditional advisory fees, according to Pershing, is expanding  an advisor’s value proposition by increasing the number of services offered to clients.

Fifty-eight percent of the conference’s attendees said that offering holistic wealth management services to their clients, including services like estate planning, tax planning and private banking, is the most important factor in giving them pricing power in the market.

“A Cerulli report showed that advisors are now typically offering up to eight distinct services to their client for their asset management fee,” said Garcia. “Compression is being painted with this broad stroke, but it’s happening everywhere else in the industry.”

Business growth is being driven by such value-added services, according to the survey, in which 74 percent said that they had grown their business by offering tax planning services.

Other value-added services stimulating business growth included alternative investments, philanthropic planning and private banking solutions.

“We may see some margin compression, where profitability is reduced at the end of the day as advisors add talent, expertise and capabilities,” said Garcia. “They’re certainly adding expenses to their businesses, but we’ve seen three consecutive years of record average operating profits for RIAs in the industry. Some of that is due to the run up in financial markets. A rising tide lifts all boats.”

Advisors at Pershing’s summit were feeling pressure from the lack of youth in the advisory profession. In the survey, 36 percent of the respondents indicated that hiring and developing new talent would be the biggest challenge for their business in 2018.

Currently, academic and industry financial planning programs are not producing enough new advisors to account for the rate of attrition and retirement in the industry, he said.

The industry is poised to lose between 6,000 and 10,000 advisors a year in the near future, said Garcia, and must find ways to serve an expanding and more diverse client base.

“When you look at the next generations and you ask them why they didn’t consider a career in financial services, their three main answers are: ‘I didn’t study finance,’ ‘I’m not interested in selling,’ and ‘the image of the industry was tarnished by the financial crisis,’” he said. “They see the image in Hollywood movies. ... They aren’t aware that this industry provides a healthy income [and] the ability to impact the lives of others, ... nurture an individual’s curiosity and provide great intellectual stimulation.”