Pricemetrix, a McKinsey company, recently released its 9th Annual The state of North American retail wealth management report. The findings suggest some important trends related to fee levels and revenue generation among advisors in the latter half of the decade.
First, the longer-term slow decline in advisory fees appears to have bottomed out. As the table below shows, new account fees have stabilized at close to one percent for the last three years. Supporting this fee trend is an increase in the breadth and depth of client relationships as advisors have sought to provide more value to their larger client relationships.
The stabilization in fee levels also occurred during the later years of an extended bull market and subsequent robust investment performance, resulting in less focus on the impact of fees on returns. It remains to be seen whether investors’ views on fee levels change significantly given the expected lower return environment.
The Pricemetrix study also shows the dramatic rise in advisors’ dependence on fee income as their primary source of revenue. In 2015, fee revenues accounted for just under half of advisors’ gross production. By 2019, this share rose to nearly 70%. If there is a material decline in AUM stemming from the pandemic’s effects on the economy and the markets it will have an immediate and significant negative impact on advisors’ income. This may lead them to be more aggressive in searching for new clients as well as retaining existing clients, which could lead to discounting of fees. However, the increase in fee-based revenue as a percentage of overall production means the impact of that strategy would be quite severe.
As we monitor the widespread impact of the pandemic and its aftermath on the economy overall and the wealth management industry specifically, we continue to keep a close eye on longer-term trends in fee levels.