Advisors Aren't Immune to Fee Pressure Anymore... Here's What Will Happen Next
For a while, wealth managers have been able to continue charging the same standard fees of 1% or more while fees in the rest of the financial services industry, such as mutual funds and even hedge funds, kept dropping — but that’s no longer the case, the Wall Street Journal writes.
Traditional advice fees have faced pressure from two fronts: on the one hand, technology changes in the industry have pushed down the costs of delivering wealth management services, according to the paper. This includes the proliferation of robo-advisors, which are expected to control $600 billion in assets within the next four years, as well as improvements such as artificial intelligence that let wealth managers automate many tasks and achieve more with less, the Journal writes.
On the other hand, as wealth is transferred from aging baby boomers to the next generation, their heirs are reassessing what’s available in financial services, putting further pressure on financial advisors, the paper writes.
“Millennials are asking a lot more questions about ‘what you’re doing for me,’” Denise Valentine, an analyst at research firm Aite Group, tells the Journal.
Research firm Cerulli Associates says the majority of clients with $1.5 million or less are paying traditional advisors between 1% and 1.5%, according to the paper. Part of the reason wealth managers have been able to hold on to their fees has been a lack of disclosure in the industry, the Journal writes. Additionally, the business is highly fragmented, which means there’s no standard rate advisors charge from one client to the next, according to the paper. But that’s no longer enough to keep the fees from falling.
“The tipping point is now,” Jay Shah, chief executive of Personal Capital, tells the Journal. “Advice is being delivered at less than 1%.”
Advisors at Voya Financial Advisors, for example, charge up to 1.5% — but some are charging 0.9%, Tom Halloran, president of the Voya unit, tells the paper.
Even large players are starting to slash fees, according to the Journal. Morgan Stanley has recently dropped the maximum fee its advisors can charge from 2.5% to 2%, while the robo-advisor it rolled out late last year charges just 0.35%, according to the Journal.
“Going forward, there will be greater pressure to prove value, and [advisors] will have to have reasons to substantiate their fee,” Valentine tells the paper.