Pricing Pressure Mounts On U.S. Advisory Industry

Data from Cerulli Associates shows a bright future for fee-based advisory arrangements—but individual advisory firms may struggle to maintain profitability. 

A new report from Cerulli Associates, “U.S. Advisor Metrics 2016: Combatting Fee and Margin Pressure,” suggests low-cost product demand and pending regulation will only serve to amplify pricing pressure on the U.S. advisory industry; yet there are also bright spots in the findings. 

“Advisers are preparing for the impact that the Department of Labor’s Conflict of Interest Rule will have on their time and resources,” Cerulli observes. “They must be ready to thoroughly document investment decisions, as well as reassess the business risk of their practices under the new regulatory environment.”

Even for firms that decide to wait and see what a Donald Trump presidency will mean for the controversial rulemaking—sticking with old business models and planning to rely on the Best Interest Contract exemption—technical compliance does not ensure client satisfaction. Nor does it ensure partner firms will decide to continue business as usual. 

“This rule may result in changing investment products, vehicles, or account types advisers choose for clients to alleviate any appearance of conflict of interest or negligence of their fiduciary duty to clients,” explains Emily Sweet, senior analyst at Cerulli Associates. Advisers, asset managers and other service providers “must be aware of the impact these reassessments will have on their partnerships … knowing that the new regulatory environment encourages advisers to make changes where the most obvious risks exist.”

Cerulli’s analysis suggests the adoption of low-cost investing is appealing to investors in a supportive market environment, as they can gain broad market exposure through vehicles such as exchange-traded funds (ETFs). As such, advisers must be open to new investing approaches to maintain relevance and trust with clients.

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“Advisers are somewhat insulated from the cost impact of ETFs because they can incorporate them into clients' portfolios without significant loss of management fee revenue,” Sweet adds. “Many asset managers, on the other hand, feel the cost impact of ETF investing directly, as lower-cost products compromise revenue and profitability.”

This interplay will be important for guiding product development in the coming years, Cerulli speculates.

“Cost is the driving factor behind the popularity of ETFs, and use of the vehicle has been reinforced by an accommodating market environment,” Sweet concludes. “However, it is possible that a change in market direction and risk environment could encourage investors to rethink their portfolio exposures … In fact, more than 75% of advisers surveyed by Cerulli agree that in volatile markets, active managers can offer downside risk protection through tactical trading.”

The Cerulli report goes on to suggest that smaller broker/dealers, in this environment, may consolidate to produce fewer entities that operate more efficiently. Similarly, consolidation and partnership among advisers may be helpful to deepen service offerings to clients and allow cost savings in meeting regulatory requirements.

Information on obtaining Cerulli Associates research is at