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Understanding Fee Pressure: Asset vs. Wealth Management

This week, Morningstar released its annual U.S. Fund Fee Study. Findings show that, on average, investors in long-term mutual funds and ETFs last year paid lower fund expenses than ever before. As the chart below shows, average fund fees have been steadily dropping since 2000, hitting a record low average expense ratio in 2016 of 0.57%. It seems increasing numbers of investors are opting for low priced passive vehicles particularly the cheapest ones from cost cutters like Vanguard and Blackrock. Further, investors who do choose active products are buying the least expensive options.

 

But while asset managers are feeling pressure to lower fees, the story does not appear to be the same on the wealth management side. A spate of industry studies from Fidelity, SEI, Cerulli and others have suggested that advisory fees (the amount that RIAs and financial advisors charge to manage clients’ wealth not counting underlying investment product charges) have remained relatively stable in recent years. These studies have also found that there has not been significant fee pressure from wealth clients nor a rise in client attrition due to onerous fees.

It is important for both asset and wealth managers to understand these current pricing trends and the different implications for their marketing strategies going forward. Wealth managers, in particular, should avoid proactive fee cutting in the face of perceived threats from Robos and other low-cost providers. Instead, they should continue to showcase their unique value, expertise, and oversight, and focus conversations on the value they add in helping clients meet their financial goals. The challenge for asset managers is more stark. There is a rapid race to the bottom in pricing for core index managers and it is unlikely that any but the largest scale providers will succeed. For active managers, particularly those that have not lowered prices, asset retention and new sales growth will depend on the ability to create alpha.