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How Lower Fees Could Put Independents on Top

By Thomas Coyle March 7, 2017

Asset management fees are coming down as lower-cost passive investments take center stage and calls for radical transparency in fee disclosure get louder.

This means change is coming to the wealth management arena as well, say industry experts.

How this plays out for individual advisors will depend on their technology platforms and, according to Shirl Penney, CEO of Dynasty Financial Partners, on their ability to articulate value and offer distinct services under clear pricing policies.

New York-based Dynasty provides a la carte infrastructure support and related services to about 40 RIAs.

For Penney, the fact of “fee pressure and the fear of margin compression” among wealth managers is “undeniable” as “the rate of innovation” in technology “and client awareness” about fees accelerates. “This will change clients’ perceptions and needs over time as well as what they will pay for various services.”

So far, Penney says advisors in his “network haven’t had to significantly lower their advisory fees — but it is something we are discussing at our network events and monitoring.”

Penney figures declining fees aren’t putting much pressure on Dynasty’s affiliates because they’re mostly “focused on the high-net-worth market” and “providing broad-based wealth management services to clients, not just asset management services.”

This focus takes the onus off asset management and puts it on financial planning, family wealth services, digital access and other services, he adds. “As a result, they have been able to maintain their pricing discipline and perhaps feel less pressure than others that provide only asset management or brokerage services.”

Still, Penney says he and his colleagues take the view that “change is constant in this industry and the best-run firms are the ones that will win.”

With this in mind, Dynasty encourages the firms it supports to be proactive about fee pressure by developing “very clear service-level agreements with clients so that their clients know clearly what they are paying for and advisors know clearly what needs to be delivered,” according to Penney.

In this business model, “If a client wants to pay 50 basis points just for asset management advice, or 75 basis points for comprehensive family-wealth planning, that’s great,” says Penney. Defining deliverables in this fashion “allows advisors to be efficient in delivery, which helps with their margins.”

Shirl Penney

One view of how fee pressure will affect wealth managers is that bank-owned brokerages might be a beneficiary, at least in the short run.

In this view, FAs at these national wealth firms will think twice about breaking away to RIAs and independent broker-dealers because their employers are operationally better able to cope with the demands of stricter fee disclosure and narrowing margins.

But Penney feels independent RIAs have certain advantages in the coming environment big firms can’t touch.

For one thing, they can charge for a greater number of distinct services in a rational and customizable way.

“Brokerage-firm advisors might have a tough time charging on assets held away, retirement-plan assets, charging for project-based work, loans, etc.,” says Penney. “Plus the revenue they generate is lower to the advisors in things like insurance, lending, etc., so the advisor doesn’t typically have the same level of gross-income potential that a private wealth-level RIA would have.”

In other words, it can really pay for an independent advisor to provide clients with the itemized service-delivery reports consumers are starting to want these days.

“RIAs tend to wrap fees less and less, so they are giving more choice to their clients in terms of what they pay for the components of wealth management, such as financial planning, investment policy design, asset management, philanthropic planning, liability management, and family-governance support,” says Penney. “Being able to charge a fair price for the work you actually do is an advantage to RIAs.”

And among RIAs, “the ones that do the best job of packaging, articulating, and ultimately delivering that advice and service will be the ones that continue to win going forward in our industry,” Penney adds.

But firms “that don’t innovate or change” for the new environment “will,” Penney concludes “unfortunately go out of business.”