While fee compression is a concern for many broker-dealers and advisors, the more they can demonstrate the value they provide to clients, the less likely they will feel pressured to lower their fees, Envestnet suggests in a new report. In addition to communicating their value proposition to clients, Envestnet further recommends that advisors should actually show all the methods they employ to add value for their clients.
Building on an earlier “Envestat” report published in April which examined trends in investment advisory fee levels over the past three years, this latest report takes a deeper dive by examining average client and advisor fees by account size and distribution channel to determine the significance and scope of fee compression.
The new report observes that advisors often cite competition as the reason for bringing fees down by significant amount (10-30 basis points), but Envestnet’s analysis indicates that actual fee compression in the market “shows a far more moderate decline in advisor fees.” For example, client fees dropped by only 3-6 basis points between 2014 and 2016, while advisor fees declined by just 2-4 basis points. The report notes that average advisor fees actually rose 1 basis point in the $100,000-$250,000 segment.
The largest decline in both client and advisor fees was experienced in the insurance channel for broker-dealers, dropping 8 basis points for clients and 9 basis points for advisors between 2014 and 2016. Meanwhile, RIAs had essentially no change in their advisor fees, and their client fees dropped by just a couple of basis points, the report shows. Independent broker-dealers saw a drop of 2 basis points in both client and advisor fees.
In the April report, Envestnet suggests that the resilience of financial advisor fees is noteworthy, as advisors seek to deliver lower cost solutions while maintaining their revenue. Moreover, in the case of SMAs and UMAs, financial advisor fees increased 1-3 basis points, whereas in MF/ETF Wrap and APM programs, average advisor fees decreased 3-5 basis points.