The July 2018 issue of The Cerulli Edge, U.S. Asset and Wealth Management Edition, examines the multiple causes of fee compression in the asset management industry, finding that the distinct causes of fee compression tend to “compound upon each other to prompt industry change.”
At a very high level, the increasing importance of asset allocation advice, both within retirement plans and for individual wealth management clients, is perhaps the strongest driver fueling a decline in asset management fees.
Bing Waldert, director at Cerulli and lead author of the report, observes that asset managers are in many cases actually dropping fees on asset management products to near zero.
“Instead, they are choosing to charge for asset allocation, a task traditionally performed by the wealth manager,” Waldert observes. “The growth of asset allocation advice demonstrates how asset and wealth managers are using these industry trends to enter each other’s value chains and attempt to capture a greater share of a shrinking fee pool.”
While the trend has not yet fully come to pass, Cerulli’s reporting suggests automation will continue to compress overall management fees.
“Automation will lower the cost of transactions, bringing down fees in wealth management,” Waldert adds. “In addition, digital advice platforms emphasize asset allocation, which pressures fees in individual asset manager products and benefits exchange-traded funds (ETFs).”
Another driver that Waldert says is perhaps the easiest to understand is the role of greater regulation. As he explains, regulation has “formalized the buying process and created demand for low-cost passive products.”
“Under the influence of professional buyers, eliminating the highest-priced products is often the first screen, creating a race to the bottom as managers try to avoid having above-average fees,” Waldert says.
Cerulli also recently published the Cerulli Edge, Global Edition, which includes an in-depth analysis of competition and services in the robo-advice marketplace.
According to Cerulli polling, investors at the lower end of the advice consumption spectrum are most open to adopting digital advice relationships. In general, these consumer segments “seek limited interaction with representatives of their advice providers, but in many cases desire final confirmation that their decision process was valid.”
While this “lower advice” group is open to digital engagement, Cerulli says these investors frequently wish to maintain a strong degree of portfolio input and control, “which has not meshed well with the inflexible options offered by the bulk of current digital advice platforms.”
In contrast, those investor segments that Cerulli considers “adviser reliant” express relatively limited interest in automated digital investing platforms. Investors in these segments are much more interested in establishing personal relationships with their advisory representatives to create the level of trust they feel is necessary to turn over control of their life’s savings.
According to Cerulli, more affluent investors report the inability to handle complex finances (60%) as a leading drawback to “hybrid” or “adviser assisted” digital wealth providers, while less affluent investors report higher fees than a fully automated investment service (65%) as a main drawback.
“The ideal model for a hybrid advice platform must be competitive on cost or be able to justify a higher fee with additional offerings that digital service alone cannot provide,” Cerulli reports.
These findings are taken from the July 2018 issue of The Cerulli Edge, U.S. Asset and Wealth Management Edition, as well as the Global Edition. More information on obtaining Cerulli research is available here.