Back in 2015, SEI published its first “Fees at a Crossroads” report, documenting the evolution of financial planning models and fee structures and examining the rancorous debate between commission-based and fee-based advisers.
Now, the firm has published a 2018 update, concluding that the stakes are even higher for advisers than they were three years ago when it comes to defining and optimizing the balance of price and value. Authors of the updated paper include John Anderson, managing director and head of SEI practice management services, SEI Advisor Network; and Raef Lee, managing director and Head of new services and strategic partnerships, SEI Advisor Network. The pair worked with Bob Veres, editor and publisher of Inside Information.
According to the research team, while threats from the Department of Labor (DOL) fiduciary rule have abated, in its wake a “fiduciary movement” continues to gain worldwide support.
“Even Pope Francis has called for a universal fiduciary standard for financial advisers, criticizing those who don’t act in the best interests of their clients,” the report notes. “Meanwhile, the initial pressure from robo-adviser innovations has morphed into a new threat with the rise of technology-savvy virtual advisory services from financial giants.”
Like the 2015 report, the 2018 update covers the many challenges advisers face in an evolving industry, but it also highlights reasons for optimism.
“We find that transparency is improving, consumers are becoming more fee-savvy and the industry is transitioning to a traditional professional service model—one that resembles the legal and accounting professions that command respect and are viewed by clients as true fiduciaries,” the report argues.
Traditional compensation models under pressure
According to the report, fees set based on assets under management are “ubiquitous,” while commission-based business is slowly fading. Simultaneously, more and more momentum is building behind “new fee-based pricing variations which account for a variety of factors.” The new approaches, according to SEI, are “more responsive to client needs, account complexity, career stage, portfolio size, etc.”
“We would argue that the compensation model would not evolve if left solely to the adviser/firm over the years,” the research explains. “The consumer has driven change and continues to push advisers to more client-centric pricing models.”
Since the initial 2015 report, industry stakeholders have wrestled with terms like “fee-only” or “fee-based.” Importantly, the paper points out, a range of new business models is emerging that diverges from traditional approaches.
Quoting one advisory industry executive, the report argues the pricing landscape is now more of a spectrum: “At one extreme, clients are offered an all-you-can-eat buffet and at the other is an a la carte menu. In between is a growing number of variations. What’s the right option? That depends on whom you’re serving. Your client base should dictate your fee model.”
Even within the heading of “fee-based advisers,” there is an increasing amount of nuance. The paper shares the example of an adviser “just serving millennials,” in which case a fixed-rate fee may be appropriate. For an adviser serving most late-career high-net-worth consumers, this brings potentially a lot more complexity, “and new fee models designed for their specific needs can reflect that shift.”
Another advisory industry executive quoted in the report suggests “price and value are beginning to diverge.”
“We’re seeing the wealth management proposition expanding beyond the boundaries of pure investment management,” he suggests. “But the further you expand, the less the all-in fee makes sense. Your fee stays the same, but your costs increase as you offer more services. If your pricing is not accompanied by an understanding of the cost to serve, you have another problem. That’s why it’s essential for advisers to be very clear about exactly what it is you’re offering and at what cost.”
The SEI white paper goes on to suggest the combination of higher client expectations and growing regulatory, operational and technology costs is increasing advisers’ costs to serve clients.
“While clients may not be asking about fees or complaining, their changing behaviors are making advisers work harder and add more services, leading to a decrease in their firms’ net revenue,” the report states. “That decrease has been masked by a rising equity market over the years (higher gross revenue.) Advisers will soon be forced to reckon with demand for more services without a corresponding increase in fees.”
This fact puts pressure on advisers to get better at defining their work and demonstrating their value.
“Most advisers know that they are offering a lot more value to some clients (the complex and the needy ones) than others who hardly ever call,” the report concludes. “When clients perceived your value to be in the investment management work that took place behind the scenes, they were largely oblivious of these differences. But one of the central points made by this study, which you have certainly noticed in your own practice, is that our profession’s perceived value is rapidly shifting from asset management to a broad array of financial planning advice.”
These services include modeling retirement expenses, tax advice, structuring a client’s planned giving activities and “even perhaps concierge services.”
The full paper is available for download here.