While stated fees have remained stable, RIAs appear to be increasingly discounting their fees and are formally unbundling their fee structures in response to a changing wealth management landscape amid declining revenue and client growth, according to new research.
The 2017 Fidelity RIA Benchmarking Study finds that the gap between actual and expected revenue yield, based on stated fees and actual client mix, is widening, suggesting that firms may be expanding the discounting of their fees. The study found that some 64% of RIAs are discounting their fees and have a median gap of 21 basis points between their expected and actual bps.
RIA revenue yield has dropped 3 bps, revenue growth has fallen to 7% and client growth is down to 5%, the lowest level in five years, according to the study. “With revenue and client growth dropping, RIA firm leaders will have to ensure that they make up in volume what they are discounting in fees,” says David Canter, RIA segment head for Fidelity Clearing & Custody Solutions.
The report notes that mid-size and larger firms are more likely to be discounters, with 79% of firms with $500 million to $999 million in assets offering discounts compared to 57% of firms with $50 million to $99 million in assets. In addition, while the average discount across all firm sizes is 21 bps, the discount jumps to 28 bps for firms with more than $1 billion in assets.
Moreover, the study found that discounters set fees 10-15 bps higher than other firms for clients with $2 million and above, but subsequently appear to negotiate lower fees across the board. This discounting behavior implies that fees being charged in the market could actually be 10-20 bps below what is being reported, according to the study.
The study further notes that RIAs are also starting to formally unbundle their offerings as a way to help protect against commoditization of investment management and it may also provide an alternative to discounting. The data shows that unbundling is taking place across all service offerings, particularly among retirement plan services (15% fewer), trust services (14% fewer) and investment management (10% fewer).
Meanwhile, RIA productivity is near its highest level in five years with assets under management per client remaining steady at $1.1 million and assets per advisor and clients per advisor up 11%, the findings show. But even though RIAs have improved productivity to maintain profit margins, they are also looking to more “transformative, longer-term initiatives” like digital solutions and client segmentation to deliver value, the report notes.
According to the study, 41% of RIAs are considering or are already using a digital advice solution, while 33% are looking to implement a digital solution in the next 18 months. In fact, digital solution users work with nearly three times the number of clients as non-users (566 vs. 202), have more than double of AUM ($533 million vs. $209 million) and three times the revenue ($4.2 million vs. $1.4 million).
As for strategic priorities, firms continue to cite marketing, strategic planning, technology and client satisfaction as high priorities, but segmentation — a topic that has received less focus — became more of a priority in 2017. The study found a 57% increase in the number of RIAs naming client segmentation, a key productivity driver, as a top-five focus area.
The findings are based on an online survey conducted April 19 through June 6, 2017, by a third-party research firm not affiliated with Fidelity with 408 RIA firms participating.