As the rest of Wall Street cuts all kinds of fees in a
race to zero, financial advisers have been the exception. That is changing.
Mutual-fund
and index-fund fees keep falling. Trading is free, depending on where you do
it. Even hedge funds have started to drop their notoriously high charges.
The
only holdouts in the race to rock-bottom fees have been traditional investment
advisers. Now that is starting to change.
Technology
is reshaping the wealth-management industry, bringing down the cost of
delivering advice and putting pressure on traditional fee models. At the same
time, the massive, continuing transfer of wealth from baby boomers to their
children means heirs are re-evaluating their financial relationships and
putting advisers on the defensive.
Mutual-fund
and index-fund fees keep falling. Trading is free, depending on where you do
it. Even hedge funds have started to drop their notoriously high charges.
The
only holdouts in the race to rock-bottom fees have been traditional investment
advisers. Now that is starting to change.
Technology
is reshaping the wealth-management industry, bringing down the cost of
delivering advice and putting pressure on traditional fee models. At the same
time, the massive, continuing transfer of wealth from baby boomers to their
children means heirs are re-evaluating their financial relationships and
putting advisers on the defensive.
The
result: Some big players—such as Morgan StanleyMS 2.75% —have begun to trim fees for traditional advice.
What’s more, some of those big names are launching automated systems called
robo advisers, which offer investors simple guidance at extremely low prices.
Vanguard Group charges 0.3% of assets annually for its robo adviser, for
instance, while Charles Schwab
Corp.’s SCHW -1.04% offering has no management fees.
“The
tipping point is now,” says Jay Shah, chief executive of Personal Capital.
“Advice is being delivered at less than 1%.”
That is
a huge change. Currently, the bulk of investors with $1.5 million or less pay
human advisers between 1% and 1.5% of their assets annually, according to
Boston-based research firm Cerulli Associates.
Two
reasons the decline has so far been slow-moving is a lack of disclosure and the
fragmented nature of the business. There isn’t one set rate that any firm or
adviser charges clients—advisers have leeway in what they charge from one
client to the next.
“People
don’t know what they pay,” says Denise Valentine, an analyst at research firm
Aite Group.
No one
suggests that financial-advice fees will go literally to zero soon. Many
investors will always pay because they think it’s worth it. And some investors
will always value a relationship with an human adviser enough to pay a bit more
than what they otherwise might for digital advice or to manage their own
investments.
But
“there is significant change occurring, and the types of changes we see point
to lower fees,” says Devin Ryan, brokerage analyst at JMP Securities LLC.
Here’s
a closer look at the factors that are starting to drive down the cost of
investment advice.
Technology
opens up options
From
robo advisers to digital tools that make human advisers more efficient,
technology will keep disrupting the industry’s way of doing business.
Traditional
advisers are still at the top of the heap, but robo advisers are slowly gaining
share. Cerulli Associates estimates that the robo-advice industry had more than
$200 billion in assets at the end of 2017—up from $80 billion a year
earlier—and will have $600 billion by the end of 2022, eating into the $20.3
trillion asset base of traditional brokerage firms.
So,
even the biggest firms have given in to pressure to modernize their
wealth-management operations with lower-cost options in order to be more
competitive.
Financial
firms are exploring other types of tech, too. Morgan Stanley in particular has
invested big in artificial intelligence meant to let brokers take on more
business by freeing them from certain daily tasks, such as automating some
client communication on volatile days. The idea: By boosting efficiency, firms
and advisers can make up for a lower-fee future by taking on a higher volume of
accounts.
More
scrutiny from heirs
Traditionally,
the investment-advice business has been built on relationships, and fees have
lacked transparency, says Mr. Ryan of JMP Securities.
But
that will change as the children of boomers inherit their assets, a transfer of
wealth estimated at $30 trillion, Mr. Ryan says.
When an
heir receives an inheritance, he or she will review the parent’s adviser
relationship, Mr. Ryan says. Younger investors in particular are often more
comfortable with digital advice than a human, a reality that will prompt some
advisers to cut fees to remain competitive.
“Millennials
are asking a lot more questions about ‘what you’re doing for me,’ ” says Ms.
Valentine.
At Voya Financial Inc.’s VOYA +0.77% Voya
Financial Advisors, roughly 2,100 advisers charge up to around 1.5% of assets,
says Tom Halloran, president of the Voya unit. But some have started charging
0.9%, he says, to be more competitive and retain customers considering
lower-cost alternatives.
When
Morgan Stanley late last year launched its robo adviser with a fee of 0.35%
annually, executives said that it was meant to attract a new generation of
clients. Many of these new clients are likely to be the children of existing
customers now positioned to inherit significant wealth.
Meanwhile,
executives at Morgan Stanley have lowered the maximum fee that human advisers
can charge clients to 2% of assets from 2.5%.
New
arrangements for services
As
advisers work to justify asset-management fees of 1% or more, many are pitching
clients on their ability to offer financial advice that goes beyond investment
allocation.
Some
say they can handle taxes, advise on business, prepare clients for retirement
years and plan for their children’s educations, as well as deliver more
specialized services. For instance, Mr. Halloran says Voya advisers are being
trained to work with clients who have children with special needs.
Still,
some experts warn that investors will want their advisers to offer those
services a la carte, letting clients pay for what they want and leave what they
don’t, Ms. Valentine says.
“Going
forward, there will be greater pressure to prove value, and [advisers] will
have to have reasons to substantiate their fee,” Ms. Valentine says.
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