Fee Pressure is Quickly Becoming a Major Problem for Advisors
Financial advisors say regulations and managing client expectations are the biggest problems they currently face. But fee pressure is becoming increasingly stressful and is on track to become their biggest concern, an FT Fund Image 2018 survey from FA-IQ sister company FT Commercial Insights shows.
The FT study reveals 10% of advisors see fees as their greatest pain point – up from 4% in a 2016 iteration of the study. FAs say this shift comes from a combination of increasing fund management fees and growing service fee concerns.
FAs say their fee pains are partially due to the increasing costs associated with using active fund managers.
Since most financial advisors primarily advise on which funds to use, associated fund management fees are a big concern, Matthew Hamilton, chairman and CEO of Hamilton Capital, which has $2.3 billion AUA, says.
He says advisors often feel pressured to select options with the lowest fee possible, particularly when comparing active and passive fund managers. Even when FAs would rather use an active manager, it’s often hard to justify the fees compared to low-cost ETF and mutual fund options, he says. For Hamilton Capital, Hamilton says they are forced to have a clear justification for selecting active investments – and if there isn’t one, they must always go with the low fee option.
In addition to pressures coming from fund choice, advisors also feel the squeeze from clients wanting to pay less. Advisors focusing on investment management instead of providing a full range of services are particularly concerned, Ray Padrón, managing partner and wealth advisor of Brightworth, says. Some asset classes have underperformed over the past decade, causing clients to ask their advisors to justify management costs based on performance, says Padrón, whose firm advises on $3.5 billion. When an FA focuses on portfolio management, they must offer the strongest performance and lowest associated cost. When performance-centric FAs charge their clients fees, they must justify the cost to clients.
While fee pressure seems to be increasingly painful for FAs, 21% of advisors polled by the FT said regulation was their top pain point. Regulations have continued to grow more complex over the years, Hamilton says. And increased regulations can make it difficult to stay within changing compliance standards – particularly when advice firms have not kept up with compliance requirements, he says.
Over the past few years, the regulatory landscape has become more difficult to navigate for many advisors. Last year the Department of Labor introduced its long-awaited fiduciary rule – but only implemented it to partial compliance. Last month that rule was vacated by a federal court. Recently the SEC introduced its own Best Interest Regulation, which purports to provide similar protections to investors.
Padrón also says new cybersecurity laws have contributed to FAs having difficulties complying with industry regulations. As previously reported the SEC has sharpened its focus on cybersecurity for financial advisors and created a unit focusing on cyber-related misconduct – adding an extra layer of costly compliance for advisors. Yet the new regulations are there for a reason, and the real-world consequences of cybersecurity threats are obvious to any advisor. The worst possible outcome is ending up on the front page of local newspapers for losing client assets after a cybersecurity breach, Padrón says.
Managing client expectations is also a consistent worry for advisors, appearing as the second-greatest pain point in both the FT’s 2016 and 2018 studies. Advisors say clients have become increasingly focused on chasing returns and unwilling to listen to advice.
Advisors also say they find it progressively more difficult to direct clients towards bigger-picture thinking and overall investment goals.
The 2018 study was conducted of 422 financial advisors spread across wirehouses, independent/regional brokerages, RIAs, and insurance companies.