Issue link: https://resources.envestnet.com/i/1528389
Pricing trends As the industry moves away from commissions, fee and subscription-based pricing structures are taking their place. Clients are often charged a fee based on a percentage of AUM, which is the most common non-commission source of revenue. Such a system is in use in approximately 90% of firms, according to data compiled by InvestmentNews 1 . That same study also showed flat fees gaining popularity, now used by a quarter of firms. Flat-fee-based pricing removes ambiguity around what the client pays and is a good fit for clients who may have pushed back on the variability of AUM fees. Regardless of the fee type, commission-based pricing is on its way out. InvestmentNews' 2013 survey of the top 25 firms pegged commissions as 52% of revenue and fees 34%, practically the opposite of today, where commissions made up 34%, but fees 54% of revenue 2 . Part of the improvement may be due to drastically improved retention rates among fixed- fee clients. Today's alternative fee structures perform just as well as traditional models. RIA advisory firm Herbert & Company found that from 2013 through 2020, retention rates for AUM clients generally stayed around 95% or higher 3 . The same was not true of fixed-fee pricing. In 2014, RIAs retained an average of 83% of those clients. However, by 2021 nearly 98% of fixed-fee clients maintained their relationship with their advisor as retention of asset-based clients fell to its lowest point since 2014. While 95% of clients paying asset-based fees are still retained, the rising popularity of fixed-fee pricing is important to note. The improvement in retention rates is likely due to both aggressive pricing strategies by fixed-fee firms and overall improvement in the value of fixed-fee services. While Herbert & Company didn't look at commission-based pricing, other data supports a continuation of declining revenues there. Many brokers lowered commissions to zero in 2019 5 , and SEC actions such as Regulation Best Interest further accelerated the move to alternative pricing structures. The pandemic may also be playing a role. The economic shocks are still reverberating, directly affecting client AUM and, in turn, fee income. Firms may see flat-fee price structures as a way to protect their bottom lines from ongoing market uncertainty. The end of commission-based pay also hasn't hurt the industry as some may have feared. InvestmentNews found that the top 25 IBDs reported more than 50% of their revenue from fees on average for the first time in 2021 while posting record revenues of $33.9 billion 6 . Asset-based fees Fixed fees Retention rate by fee type 4 100% 95% 90% 85% 80% 2014 2016 2018 2020 94.0% 93.0% 97.0% 97.0% 96.0% 98.0% 95.4% 97.0% 85.0% 83.0% 84.0% 89.0% 88.0% 92.0% 93.0% 97.7% 3 © 2024 ENVESTNET, INC. FOR HOME OFFICE AND ADVISOR USE ONLY. NOT FOR DISTRIBUTION TO THE PUBLIC.