Fidelity Clearing & Custody Solutions has released new research from its 2017 Fidelity RIA Benchmarking Study, which found that registered investment advisors are taking new measures to adapt to a changing wealth management landscape amid declining revenue and client growth.
According to the study, RIA revenue yield has dropped 3 basis points, revenue growth has fallen to 7 percent and client growth is down to 5 percent, the lowest level in five years. The study identified shifts happening in three areas, including pricing, productivity, and segmentation.
“While discounting fees can contribute to revenue yield erosion, some erosion can be expected against the backdrop of new strategies increasing scale and driving down the cost of business,” said David Canter, head of the RIA segment for Fidelity Clearing & Custody Solutions.
He added, “With revenue and client growth dropping, RIA firm leaders will have to ensure that they make up in volume what they are discounting in fees. But, discounting could signal that RIAs are bridging to the practice of unbundled fee structures, which may help to attract fee-sensitive clients, align services with value, and protect against the commoditization of investment management.”
Fidelity noted that the changing landscape means that firms must evolve and find new ways to deliver value. Currently, 41 percent of investors would be more likely to work with a financial advisor if their fees were lower. The study uncovered shifts in pricing and concluded that RIAs are considering that alternative pricing structures may be critical to attracting new clients.
RIAs are not reducing stated prices, as core basis point fees across all firm sizes have remained stable; instead, the study found that RIAs are discounting their fees: 64 percent of RIAs are discounting their fees, showing a gap between their expected and actual basis points.
Mid-size and larger firms are more likely to be discounters, with 79 percent of firms with $500-$999 million in assets offering discounts compared to 57 percent of firms with $50M-$99 million in assets.
According to the study, the average discount across all firm sizes is 21 bps, but the discount jumps up to 28 bps for firms with more than $1billion in assets. Discounters set fees 10-15 basis points higher than other firms for clients $2 million and above, but then appear to negotiate lower fees across the board,
Fidelity concluded that this discounting behavior implies that fees being charged in the market could actually be 10-20 basis points below what is being reported.
In addition to discounting, RIAs are also starting to formally unbundle their offerings. The study found that unbundling is taking place across all services, namely: retirement plan services (15 percent fewer), trust services (14 percent fewer), and investment management (10 percent fewer).
According to the study, RIA productivity is at or near its highest level in five years with assets under management per client remaining steady at $1.1 million, and assets per advisor and clients per advisor up 11 percent.
RIAs have improved productivity to maintain profit margins but are also starting to look to more transformative, longer-term initiatives like digital solutions and client segmentation to deliver value.
The study found that 41 percent of RIAs are considering or already using a digital solution, and 33 percent are looking to implement a digital solution in the next 18 months.
Digital solution users work with nearly three times the number of clients as non-users (566 vs. 202), have 2.5 times higher assets under management ($533 million vs. $209 million) and 3 times the revenue ($4.2 million vs. $1.4 million).
Technology remains a priority for RIAs with 49 percent reporting that investing in new or existing technology is a strategic priority for their firm.
Fidelity Clearing & Custody Solutions is the division of Fidelity Investments that provides clearing and custody to registered investment advisors, broker-dealer firms, family offices, retirement record keepers and banks. Fidelity has $6.7 trillion in client assets under administration, including managed assets of $2.4 trillion as of November 30, 2017.