Independent Financial Advisor Fee Comparison: All-In Costs

Executive Summary

While the standard rule-of-thumb is that fiscal advisors charge 1 % AUM fees, the reality is that as with most of the investment management industry, fiscal adviser fee schedules have graduated rates and breakpoints that reduce AUM fees for larger report sizes, such that the median advisory fee for high-net-worth clients is actually closer to 0.50 % than 1 % .
yet at the lapp time, the sum all-in monetary value to manage a portfolio is typically more than “ just ” the adviser ’ second AUM fee, given the implicit in intersection costs of ETFs and common funds that most fiscal advisors still use, not to mention transaction costs, and respective platform fees. consequently, a late fiscal adviser fee learn from Bob Veres ’ Inside Information reveals that the genuine all-in monetary value for fiscal advisors averages about 1.65 %, not “ barely ” 1 % !
On the early hand, with growing competitive pressures, fiscal advisors are increasingly compelled to do more to justify their fees than just assemble and oversee a diversify asset allocated portfolio. rather, the standard investment management fee is increasingly a fiscal planning fee arsenic good, and the typical adviser allocates closely half of their bundled AUM fee to fiscal planning services ( or otherwise charges individually for fiscal plan ) .
The end solution is that comparing the monetary value of fiscal advice requires looking at more than “ good ” a single advisory fee. rather, costs vary by the size of the client ’ second accounts, the nature of the adviser ’ second services, and the way portfolios are implemented, such that advisory fees must in truth be broken into their part parts : investment management fees, fiscal planning fees, intersection fees, and platform fee.

From this perspective, the reality is that the assign of a fiscal adviser ’ randomness fees allocable to investment management is actually not that unlike from robo-advisors immediately, suggesting there may not be much investment management tip compression on the horizon. At the same time, though, fiscal advisors themselves appear to be trying to defend their own fees by driving down their all-in costs, putting pressure on intersection manufacturers and platforms to reduce their own costs. Yet throughout it all, the Veres research concerningly suggests that even as fiscal advisors increasingly shift more of their advisory tip value proposition to fiscal design and wealth management services, advisors are still struggling to demonstrate why fiscal planning services should command a pricing premium in the marketplace .

How Much Do Financial Advisors Charge As Portfolios Grow?

One of the biggest criticism of the AUM commercial enterprise model is that when fiscal adviser fees are 1 % ( or some other share ) of the portfolio, that the adviser will get paid twice a much money to manage a $ 2M portfolio than a $ 1M portfolio. Despite the reality that it won ’ thymine probable take twice a a lot time and feat and workplace to serve the $ 2M node compared to the $ 1M client. To some extent, there may be a little more complexity involved for the more feeder customer, and it may be a little hard to market and get the $ 2M client, and there may be some greater liability photograph ( given the larger dollar amounts involved if something goes ill-timed ), but not necessarily at a 2:1 ratio for the customer with doubly the score size .
so far traditionally, the AUM business has long been a “ volume-based ” business, where larger portfolios reach “ breakpoints ” where the marginal fees get lower as the dollar amounts get bigger. For case, the adviser who charges 1 % on the first $ 1M, but “ alone ” 0.50 % on the future $ 1M, such that the with double the assets does pay 50 % more ( in recognition of the costs to grocery store, extra service complexity, and the liability exposure ), but not double .
however, this means that the “ typical fiscal adviser tip ” of 1 % is reasonably misinform, as while it may be true that the modal fiscal advisory fee is 1 % for a particular portfolio size, the fact that fees tend to decline as account balances grow ( and may be higher for smaller accounts ) means the normally cited 1 % tip fails to convey the true smell of the typical calibrated tip schedule of a fiscal adviser .
fortunately, though, holocene research by Bob Veres ’ Inside Information, in a survey of about 1,000 advisors, shines a clean light on how fiscal advisors typically set their AUM fee schedules, not equitable at the mid-point, but up and down the scale for both smaller and larger score balances. And as Veres ’ inquiry finds, the median advisory fee up to $ 1M of assets under management in truth is 1 %. however, many advisors charge more than 1 % ( particularly on “ smaller ” account balances ), and often well less for larger dollar amounts, with most advisors incrementing fees by 0.25 % at a meter ( e.g., 1.25 %, 1.00 %, 0.75 %, and 0.50 % ), as shown in the chart below .
Comparison Of Financial Advisor Fee Levels By Portfolio Size
More broadly, though, Veres ’ research affirms that the median AUM fee very does decline as assets rise. At the lower end of the spectrum, the distinctive fiscal advisory fee is 1 % all the way up to $ 1M ( although notably, a hearty number of advisors charge more than 1 %, peculiarly for clients with portfolios of less than $ 250k, where the median fee is about 1.25 % ). however, the median tip drops to 0.85 % for those with portfolios over $ 1M. And as the dollar amounts rise far, the medial investment management tip declines far, to 0.75 % over $ 2M, 0.65 % over $ 3M, and 0.50 % for over $ 5M ( with more than 10 % of advisors charging fair 0.25 % or less ) .

notably, because these are the declared advisory fees at particular breakpoints, the blend fees of fiscal advisors at these dollar amounts would even be slenderly higher. For exemplify, the medial advisory fee at $ 2M might be 0.85 %, but if the adviser truly charged 1.25 % on the first $ 250k, 1 % on the future $ 750k, and 0.85 % on the adjacent $ 1M after that, the blend tip on a $ 2M portfolio would actually be 0.96 % at $ 2M .
however, the luff remains : as portfolio account balances grow, advisory fees decline, and the “ distinctive ” 1 % AUM fee is in truth equitable a distinctive ( borderline ) fee for portfolios around a size of $ 1M. Those who work with smaller clients tend to charge more, and those who work with larger clients tend to charge less .
Median AUM Fee Schedules Based On Portfolio AUM

How Much Do Financial Advisors Cost In All-In Fees?

The caveat to this psychoanalysis, though, is that it doesn ’ t actually include the fundamental expense ratios of the investing vehicles being purchased by fiscal advisors on behalf of their clients .
Of course, for those who purchase person stocks and bonds, there are no underlying wrap fees for the underlie investments. however, the late FPA 2017 Trends In Investments Survey of Financial Advisors finds that the overpowering majority of fiscal advisors use at least some reciprocal funds or ETFs in their customer portfolios ( at 88 % and 80 %, respectively ), which would entail extra costs beyond just the advisory fee itself .
Advisor Use Of Investment Products With Clients Over Time
fortunately, though, the Veres study did review not only advisors ’ own AUM tip schedules, but besides the expense ratios of the underlying investments they used to construct their portfolios. And as the results unwrap, the fundamental expense ratios add a non-trivial total all-in price to the distinctive fiscal advisory fee, with the bulk of blended expense ratios coming in between 0.20 % and 0.75 % ( and a median of 0.50 % ) .
Average Blended Expense Ratio Of Investments Used By Financial Advisors
Of course, when it comes to ETFs, deoxyadenosine monophosphate well as the advisors who trade person stocks and bonds, there are besides underlie transaction costs to consider. fortunately, given the size of typical adviser portfolios, and the ever-declining ticket charges for banal and ETF trades, the accumulative impingement is fairly modest. still, while most advisors estimated their trade costs at precisely 0.05 % /year or so, with about 15 % at 0.02 % or less, there were another 18 % of advisors with trade costs of 0.10 % /year, about 10 % up to 0.20 % /year, and 6 % that deal more actively ( or have smaller typical client account sizes where fixed ticket charges consume a larger part of the account ) and calculate accumulative transaction costs flush higher than 0.20 % /year .
In addition, the reality is that a number of fiscal advisors work with advisory platforms that individually charge a platform fee, which in some cases covers both engineering and platform services and besides an all-in wrap fee on trade costs ( and/or access to a No-Transaction-Fee [ NTF ] platform with a chopine wrapper cost ). Amongst the more-than-20 % of advisors who reported paying such fees ( either immediately or charged to their clients ), the median fee was 0.20 % /year .
consequently, once all of these versatile underlying costs are packaged together, it turns out that the all-in costs for fiscal advisors – even and including fee-only advisors, which comprised the majority of Veres ’ data set – including the entire cost of AUM fees, plus underlie expense ratios, plus trade and/or platform fees, are a good spot higher than the normally reported 1 % fee .
For case, the median all-in cost of a fiscal adviser serving under- $ 250k portfolios was actually 1.85 %, dropping to 1.75 % for portfolios up to $ 500k, 1.65 % up to $ 1M, and 1.5 % for portfolios over $ 1M, dropping to $ 1.4 % over $ 2M, 1.3 % over $ 3M, and 1.2 % over $ 5M .
All-In Total Cost Of Financial Advisor AUM Fees By Portfolio Size

notably, though, the decline in all-in costs as assets rise moves signally in-line with the adviser ’ s underlying tip schedule, suggesting that the adviser ’ mho “ underlying ” investments and platform fee are actually signally stable across the spectrum .
For case, the median all-in cost for “ small ” clients was 1.85 % versus an AUM fee of 1 % ( although the median fee was “ about ” 1.25 % in Veres ’ data ) for a deviation of 0.60 % – 0.85 %, larger clients over $ 1M face an all-in price of 1.5 % versus an AUM tip of 0.85 % ( a dispute of 0.65 % ), and even for $ 5M+ the distinctive total all-in price was 1.2 % versus a medial AUM tip of 0.5 % ( a difference of 0.70 % ). Which means the sum monetary value of underlying – trade fees, expense ratios, and the rest – is relatively static, at around 0.60 % to 0.70 % for advisors across the spectrum !
Median All-In AUM Fees Of Financial Advisers (By Portfolio Size)

On the one hand, it ’ south slightly storm that as customer account size turn, advisors reduce their fees, but chopine fees and underlying expense ratios do not decrease. On the other hand, it is possibly not so surprise given that most common funds and ETFs don ’ t actually have expense ratio breakpoints based on the amount invested, specially as an increasing number of low-cost no-load and institutional-class shares are available to RIAs ( and soon, “ clean shares ” for broker-dealers ) regardless of asset size .
It ’ randomness besides celebrated that at least some adviser platforms do indirectly “ rebate ” back a share of chopine and implicit in fees, in the form of better payouts ( for broker-dealers ), soft dollar concessions ( for RIAs ), and other indirect fiscal benefits ( for example, discounted or barren software, higher tier service teams, access to conferences, etc. ) that reduces the adviser ’ sulfur costs and allows the adviser to reduce their AUM fees. Which means indirectly, platforms fees probable do get at least a small cheaper as account sizes lift ( or at least, as the overall size of the advisory fast rises ). It ’ s plainly expressed as a full platform accusation, with a dowry of the cost rebated to the adviser, which in turn allows the adviser to pass through the discount by reducing their own AUM fee successfully .

Financial Advisor Fee Schedules: Investment Management Fees Or Financial Planning Fees?

One of the other noteworthy trends of fiscal advisory fees in holocene years is that fiscal advisors have been compelled to do more and more to justify their fees, resulting in a intensify in the sum of fiscal design services provided to clients for that lapp AUM fee, and a accompaniment decay in the net income margins of advisory firms .
To clarify how fiscal advisors side their AUM fees, the Veres study besides surveyed how advisors allocate their own AUM fees between investing management and non-investment-management ( i.e., fiscal plan, wealth management, and early ) services .
not surprisingly, barely 5 % of fiscal advisors reported that their entire AUM fee is truly good an investment management tip for the portfolio, and 80 % of advisors who reported that at least 90 % of their AUM fee was “ lone ” for investing management stated it was plainly because they were charging a separate fiscal planning fee anyhow .
For most advisors who do bundle in concert fiscal plan and investment management, though, the Veres study found that most normally advisors claim their AUM fee is an even divide between investment management services, and non-investment services that are plainly paid for via an AUM fee. In other words, the distinctive 1 % AUM fee is in truth more of a 0.50 % investment management fee, plus a 0.50 % fiscal plan fee .
Self-Reported Percentage Of Advisor's AUM Fee Actually Paying For Investment Management
possibly most assume, though, is that there ’ s about no coarse consensus or diligence standard about how much of an adviser ’ second AUM tip should in truth be an investment management tip versus not, despite the common use of a wide-eyed roll of labels like “ fiscal adviser ”, “ fiscal planner ”, “ wealth director ”, etc .
As noted earlier, in region this may be because a subset of those advisors in the Veres study are just charging individually for fiscal plan, which increases the percentage-of-AUM-fee-for-just-investment-management allocation ( since the design is covered by the plan fee ). however, the fact that 90 % of advisors placid claim their aum shinrikyo fees are no-more-than-90 % allocable to investment management services suggests the majority of advisors package at least some non-investment value-adds into their investment management fee. Yet how much is packaged in and bundled together varies enormously !

More broadly, though, this ambiguity about whether or how a lot value fiscal advisors provide, beyond investment management, for a single AUM fee, is not unique to the Veres sketch. For exemplify, last year ’ mho 2016 Fidelity RIA Benchmarking Study found that there is virtually no relationship between an adviser ’ randomness fees for a $ 1M node, and the breadth of services the adviser actually offers to that customer ! In hypothesis, as the breadth of services to the client rises, the advisory fee should rise a well to support those extra value-adds. alternatively, though, the Fidelity study found that the median advisory fee of 1 % remains throughout, careless of whether the adviser merely offers wealth management, or bundles together 5 or even 9 early supporting services !
Self-Reported Advisory Fees On $1M Portfolio, By Number Of Bundled Services

The Future Of Financial Advisor Fee Compression: Investment Management, Financial Planning, Products, And Platforms

overall, what the Veres study suggests is that the typical all-in AUM fee to work with a fiscal adviser is actually broken up into respective component parts. For a total-cost AUM fee of 1.65 % for a portfolio up to $ 1M, this includes an advisory tip of 1 % ( which in twist is split between fiscal plan and investing management ), plus another 0.65 % of underlying expenses ( which is separate between the underlie investment products and chopine ). Which means a fiscal adviser ’ south all-in costs actually need to be considered across all four domains : investment management, fiscal planning, products, and platform fees .
Breakdown Of Typical Financial Advisor's All-In Costs
notably, how the underlying costs come in concert may vary significantly from one adviser to the future. Some may use lower-cost ETFs, but have slenderly higher trade fees ( given ETF ticket charges ) from their platforms. Others may use common funds that have no transaction costs, but indirectly pay a 0.25 % platform fee ( in the form of 12b-1 fees paid to the platform ). Some may use more expensive reciprocal funds, but trim their own advisory fees. Others may manage individual stocks and bonds, but charge more for their investment management services. A TAMP may combine together the platform and product fees .
overall, though, the Veres data reveals that the breadth of all-in costs is even wider than the width of AUM fees, suggesting that fiscal advisors are finding more consumer sensitivity to their advisory fees, and less sensitivity to the underlying platform and intersection costs. On the other hand, the rising drift of fiscal advisors using ETFs to actively manage portfolios suggests that advisors are trying to combat any sensitivity to their advisory fees by squeezing the costs out of their underlie portfolios alternatively ( i, by using lower-cost ETFs alternatively of actively managed reciprocal funds, and taking over the investment management tip of the reciprocal fund director themselves ) .

In turn, we can consider the potential implications of fee compression by looking across each of the effect domains : investment management, fiscal plan, and what is typically a combination of products and platform fees .
When it comes to investment management fees, the fact that the distinctive fiscal adviser already allocates lone half of their advisory fee to investment management ( albeit with a across-the-board variance ), suggests that there may actually not be much fee compression looming for fiscal advisors. After all, if the adviser ’ s distinctive AUM tip is 1 % but only half of that – or 0.50 % – is for investment management, then the fee international relations and security network ’ thymine that far off from many of the recently launched robo-advisors, including TD Ameritrade Essential Portfolios ( 0.30 % AUM fee ), Fidelity Go ( 0.35 % AUM tip ), and Merrill Lynch Guided Edge ( 0.45 % AUM tip ). At worst, the tip compression gamble for saturated investing management services may “ only ” be 20 basis points anyhow. And for larger clients – where the tip schedule is falling to 0.50 % anyhow, and the investment management assign would be only 0.25 % – fiscal advisors have already converged on “ robo ” pricing .
On the early hand, with the fiscal planning assign of fees, there appears to be little tip compression at all. In fact, as the Fidelity benchmarking study shows, consumers ( and advisors ) appear to be struggling greatly to assign a clear value to fiscal plan services at all. not to say that fiscal plan services aren ’ t valuable, but that there ’ s no clearly consensus on how to value them efficaciously, such that firms provide a wildly unlike scope of supporting fiscal planning services for substantially exchangeable fees. Until consumers can more clearly name and understand the differences in fiscal plan services between advisors, and then “ comparison shop ” those prices, it ’ mho unmanageable for fiscal planning tip compression to take hold .
By line, fee compaction for the combination of platforms and the underlie merchandise expenses appears to be most advanced for disruption. And arguably, the ongoing transformation of fiscal advisors towards lower price product solutions suggests that this tendency is already well afoot, such that even as advisory firms continue to grow, the asset management diligence in the aggregate saw a decline in both revenues and profits in 2016. And the course may merely accelerate if increasingly sophisticate rebalancing and model management software begins to create “ Indexing 2.0 ” solutions that make it feasible to eliminate the ETF and reciprocal fund tip layer all in all. similarly, the vogue of fiscal advisors from broker-dealers to RIAs suggests that the entire cost layer of broker-dealer platforms is besides under pressure. And TAMPs that can ’ t get their all-in price below the 0.65 % platform-plus-product tip will likely besides face growing imperativeness .
All-In Fee Component Susceptibility To Financial Advisory Fee Compression
notably, though, these trends besides help to reveal the growing coerce for fiduciary regulation of fiscal advisors – because as the investment management and product/platform fees continue to shrink, and the relative contribution of fiscal planning services grow, the core of what a fiscal adviser “ does ” to earn their fees is changing. Despite the fact that our fiscal adviser regulation is based chiefly on the underlying investing products and services ( and not fee-for-service fiscal plan advice ) .
however, the point remains that fiscal adviser tip compaction is at best a more nuanced history than is normally told in the media today. To the extent fiscal advisors are feeling tip press, it appears to be resulting in a chemise in the adviser value suggestion to earn their 1 % fee, and a drive to bring down the underlie costs of products and platforms to defend the adviser ’ mho fee by trimming ( other ) components of the all-in monetary value alternatively. Though at the like prison term, the data suggests that consumers are less sensible to all-in costs than “ just ” the adviser ’ randomness fee… raising the interrogate of whether analyzing all-in costs for fiscal advice may become the following battlefield issue for fiscal advisors that seek to differentiate their costs and value .
In the interim, for any fiscal advisors who want to access Veres ’ White Paper on Advisory Fees and view results, you can request a free copy here.

So what do you think? Do you think financial advisors’ investment management fees are pretty much in line with robo advisors already? Is fee compression more nuanced than typically believed? Please share your thoughts in the comments below!

source : https://www.peterswar.net
Category : Finance

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