Issue link: https://resources.envestnet.com/i/1527630
FOR ADVISOR USE ONLY. NOT FOR PUBLIC DISTRIBUTION. 5 Fee compression There's been a lot of talk about fee compression in the advisory business, and for good reason. Changing client preferences, new robo- advisor entrants serving more clients for less, and other trends discussed in these pages are putting downward pressure on advisor fees, and advisors who rely on fees as a significant portion of their revenue are understandably concerned. To add to these challenges, investor preferences for low-cost index mutual funds and ETFs have contributed to reduced fees, amounting to nearly 40% for both active mutual fund expenses and fees. 9 Yet taking a step back, research shows fees have gradually increased over the past five years, primarily due to advisors incorporating additional services like tax and estate planning, banking advice, lending advice, succession planning, and life insurance planning into their practices. More advisors are becoming holistic wealth managers, offering a full suite of planning services and strategic advice, justifying an increase in fees. 9 What is fee compression and why does it matter? Fee compression refers to the downward pressure on fees charged by firms and advisors. Since RIAs generally charge clients either an hourly or a flat fee to dispense advice or a percentage of their assets under management (AUM), fee compression threatens revenue streams and profit margins. When fee compression becoming more prevalent, advisors have to generate additional AUM to keep revenue flat. This means finding ways to bring in new assets and identifying additional sources of income. Asset manager fee compression 10 Asset-weighted average expense ratios between 2000 and 2022 (bps) '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 66 44 16 11 5 5 106 77 27 21 28 17 Index equity ETFs Index bond ETFs Index bond mutual funds Index equity mutual funds Actively managed equity mutual funds Actively managed bond mutual funds 120 100 80 60 40 20 0 2018 2019 2020 2021 2022 Wtd Avg. 10-50K 50-100K 100-250K 250-500K 500K-1M 1M-2.5M 2.5-5M 5M+ Advisor Fees 11 89.93 97.08 94.21 106.36 97.81 103.70 95.39 98.37 92.65 96.44 86.07 92.80 77.23 86.41 67.91 77.89 51.77 59.49 Takeaway It's hard to compete with rock-bottom fees, but by expanding their services and using technology to maximize efficiency, advisors can operate more profitably, regardless of how much clients are paying.