Time to Kill the AUM Fee?

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Almost two years ago, Financial Planning ran a story on the newly emerging class of so-called robo advisors. A key issue to understand, we said at the time, was this: Would the new digital players be like Expedia, putting human rivals out of business, or TurboTax, serving the masses while leaving the high end of the market to elite services?

The final answer is still not clear. But the pressure these new rivals are putting on industry fee structures is starting to become apparent. After all, if a digital tool can handle asset allocation and rebalancing for 35 basis points or less, what are advisors doing to justify the industry standard of 1% of assets under management?

That question is just starting to ripple through the industry. And as this month’s cover story shows, the answers — where advisors are even entering the conversation — are varied.

For executives like Savant Capital’s Brent Brodeski, the evolving marketplace has shifted the firm from being a low-cost option to a higher-cost provider, necessitating a rigorous emphasis on delivering value to clients. For other RIAs, restructured compensation schemes look more like retainers, or à la carte pricing, or even a fee based on annual income and total wealth.
Robo competition isn’t the only issue. Shifting economics provide another reason for advisors to rethink the way they are charging clients.

“If you don’t make any other changes to your pricing structure,” FA Insight’s Eliza De Pardo -- the co-author (with Dan Inveen) of a new TD Ameritrade Institutional report on pricing trends -- told attendees at TDAI’s national conference, implementing a minimum fee “is the one to make.”

Are advisors listening? Maybe a little bit. About a quarter of fee-only advisory firms surveyed said they had changed their fee structure in the past year; another 13% said they were likely or somewhat likely to alter their fees this year.

Tom Nally, TDAI’s president, told me in January that he thinks the fee structure conversation is about three years behind succession planning — which itself is still an area where some advisors are dragging their feet.

But at least, he pointed out, advisors are no longer arguing with him about the need to plan for succession. Perhaps they’ll come around on pricing as well — and hopefully, before it’s too late. 

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