Whatever the Trump administration decides to do with the U.S. Department of Labor’s rule that applies the fiduciary standard to retirement accounts, the cost structure of the wealth management complex is changed forever because many, if not most, investors are dialed into the concept that fees matter. Fund providers have gotten the message, and increasingly are decreasing the fees they charge for their products. And financial advisors also need to be ever-mindful of the fees they charge their clients, says a recent report from financial services research firm Cerulli Associates.

“During the past several years, the magnitude of fees has become a challenge that directly affects the way in which financial advisors construct client portfolios,” says Tom O’Shea, associate director at Cerulli. “New regulations cast a spotlight on high-priced investment vehicles.”

In Cerulli’s Survival in a Low-Fee World report, O’Shea notes that various factors beyond regulations are making consumers more sensitive to fees, such as the media and the emergence of digital advisors shedding light on the high cost of investing.

He suggests advisors explore alternative pricing models by using low-cost investment vehicles such as “I” share mutual funds, exchange-traded funds and model-delivered managed accounts. That said, these can only generate so much savings, particularly because managed account sponsors have placed downward pressure on managers for years. “At some point,” O’Shea says, “advisors need to scrutinize their own fees.”

One of the takeaways from the Cerulli report is that providing clients value while maintaining profitability forces providers to think in new ways.
“Clients build wealth on what they earn net of fees. With all eyes turning toward fees, low-cost investments, goals-based planning and managed accounts as qualified default investment alternatives are generating notice as vehicles for adding true client value,” says O’Shea, whose main points are summarized below:

• Setting appropriate expectations with clients has heightened their sensitivity to the cost of investment advice.

• Awareness of fees is growing; clients are savvier about hidden expense ratios and commissions than they were just a few years ago.

• Professionals responsible for portfolio construction should note younger clients’ awareness of fees. As their wealth becomes a greater portion of investable assets, pricing pressure will increase.

• Target-date solutions should emphasize low cost and automation, which reduce the participant’s need to make a decision unless they choose.

• The customized nature of managed accounts and the access they provide to representatives who can discuss concerns make them well-suited for a retirement plan’s older participants.

• A managed account provider can access a plan participant’s characteristics from the record keeper without requiring the participant to complete a detailed questionnaire. These characteristics are used to customize a managed account’s asset allocation.

• Institutional investors have long used goals-based planning to match future liabilities with cash flows. Advisors are adopting the approach with retail clients, especially in the high-net-worth space.

• Goals-based investing engages clients from the outset by having them actively involved in the decision-making process without requiring an in-depth level of investment knowledge.

O’Shea’s report was part of the February issue of The Cerulli Edge – U.S. Edition, which examines ways in which financial advisors can add value to clients.