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Fidelity: Organic RIA Growth Falls to Five-Year Low

By Murray Coleman December 15, 2016

Earlier this year, benchmarking studies from the likes of Schwab and TD Ameritrade differed on how sustainable double-digit revenue growth might prove in coming years for independent RIAs.

Now Fidelity is tossing its hat into the debate. The behemoth RIA custodian, which Thursday released its latest study of RIA business trends, points to overarching “organic growth” issues still plaguing the industry.

“While we see a bull market for wealth management over the longer term, we’re also finding continuing pressure on fee revenues,” says David Canter, who heads practice management and consulting outreach at Fidelity, which works with more than 2,700 indie RIAs.

Fee pressures are coming to a head and strong enough to cause Fidelity’s researchers to warn of a “crossroads of sorts” for the industry in the way it's charging for wealth management services, he adds.

In 2015, for example, Fidelity’s benchmarkers estimate that RIA median organic growth fell to 6.7%. That’s the lowest level in five years, Canter tells FA-IQ. “The advisors we surveyed expressed widespread concern about the state of pricing caused by the ongoing commoditization of investment management and the growing popularity of passively managed strategies,” he says.

Fidelity defines “organic growth” in terms of new money put into existing accounts as well as fresh assets brought in by newly-minted clients. Its research also looks at flow patterns of assets leaving firms.

“This benchmarking study suggests that acquiring new assets is getting harder and more expensive to pull off on an ongoing basis,” Canter says.

That could leave many RIAs with lagging growth down the line, according to the report. It finds that fewer than a third (31%) of all indie wealth managers have set up tiered fee and service schedules tailored to handle different types of clients with variable account sizes.

That’s a huge lost opportunity, Canter says, since Fidelity’s surveys show that most high-earning Millennials are interested in getting professional advice but don’t follow through because of a perception that fees by traditional FAs are too out-of-sync with today’s marketplace.

“It’s a very tricky proposition for this industry – once you introduce a new generation of clients to a lower price point, it’s hard to raise those levels down the road,” Canter says.

“Acquiring new assets is getting harder and more expensive to pull off on an ongoing basis.”
David Canter

But it’s a myth that most fee-based indie advisors charge 1% or more, argues Michael Gouldin, CEO of Gouldin & McCarthy in Basking Ridge, N.J. His RIA, which manages about $450 million, charges an average of about 0.75% across its book of discretionary planning clients.

And that’s not even counting larger institutions and corporate retirement plans, Gouldin adds. Those fees typically run well below 0.30% a year, he notes. “We’re like almost every independent RIA – our business is built around different breakpoints in pricing, depending on not just account size but also the types of services we’re delivering,” Gouldin says.

Indeed, Fidelity’s benchmarking report finds independent RIAs generating a median revenue yield – a blended measure of fee revenue from all accounts – of about 0.69%.

Still, that’s down some four basis points since 2014, according to Canter. “Advisors are used to leading with investment management and wrapping all of their other planning services together to present one overall fee to clients,” he says.

But that might be a mistake in today’s economy, Fidelity’s research indicates. As Canter puts it: “If you believe that robos are going to set a floor of 25 basis points, it’s going to be important for firms to more finely break out their service menus and fee schedules for clients.”

Grant Rawdin, CEO of Philadelphia-based Wescott Financial Advisory Group, has already separated his firm’s client base into different strategic segments.

Those with $2 million or more of investable assets are assigned a certain fee schedule that covers all financial and investment planning required. Clients with smaller accounts are charged a different fee based on assets under management and their financial planning needs.

Grant Rawdin

“We’ve segmented our clients in terms of fees and services, which allows us to work with families who have smaller asset levels but face sophisticated planning issues,” says Rawdin, whose firm manages $2.3 billion.

Since breaking up his fee schedules by market segments in 2011, he adds, Wescott Financial is seeing stronger revenue growth with all types of clients.

“We’ve been able to do planning," Rawdin says, "using a much more efficient business model that allows us to keep feeding our pipeline of new clients.”

At the same time, he believes that by developing a more flexible set of criteria his firm can “better highlight the value of our planning support” and talk less about fees in a vacuum. “A more segmented and nuanced approach is allowing our advisors to present clients with a fee structure in context of the services they’re receiving – and in a more transparent way,” Rawdin says.