An earlier version of this article contained an error in section 7 (on reasonable fees). This was corrected at 1:11pmET on 7/20/17.
I asked the readers of my Inside Information service, members of the Advisor Perspectives community, and others, to tell me how they were charging their clients, and how much. The most interesting conclusions related to a key question that has arisen from the DOL Rule: what is a “reasonable” AUM fee to charge clients?
To know that, you have to know what others are charging for similar services. Our survey provided key insights.
Of course, I asked a lot of other questions, like how advisory firms were charging (AUM, flat fee retainers, hourly, commissions etc.), and how much of their AUM fees were allocated to asset management activities versus other services (like financial planning). I broke the results down based on the experience of advisors answering the questionnaire, and the size of the firms, and their business structure, to make the data more relatable to a wide spectrum of readers.
Most of the respondents – and, indeed, most of the readers of my Inside Information service – are fee-only, and just under half have more than 20 years of experience. The Inside Information profile tends to be successful thought leaders and early adopters who practice as fiduciaries, which means the sample under-represented sales agents and those who live mainly on commissions.
Here’s what I found from this interesting sample:
- Most (almost exactly two-thirds) of the respondents are charging some form of fees other than AUM.
There’s a chart in the survey that breaks this down, but 33.37% of the respondents reported that they charge their clients via AUM only. Just over 11% don’t charge by AUM at all; they either charge retainers only (5.23%), or hourly only (3.24%), or some combination of both (2.93%). More than 43% reported that they now use retainers as a part of their fee structure.
This represents a significant shift in the profession, but the shift is obviously only in the beginning stages. I predict that two years hence, the number of advisory firms that have abandoned AUM altogether will have doubled, and very few firms will be charging AUM only.
- There is very little agreement in the marketplace about how much to charge portfolios of various sizes.
When I asked what AUM percentage advisors were charging, the responses were all over the lot, which is made clear by the graphs. The most common responses for a $1-2 million portfolio were 0.50%, 0.75%, 0.90% and 1.00%. But there were significant numbers of advisors who charged more and less than those amounts. (The median was 0.85%.)
- There is clear evidence of fee compression for mutual funds, but not as much as I expected.
The movement toward ETFs is alive and well. More than half of the sample told me that the blended expense ratios of their recommended investments were below 0.50%.
But if you look at the data from a different angle, roughly half of advisors are paying more than that. Roughly 10% are still willing to pay more than 1% across client portfolios for active management.
- Total all-in portfolio costs are lower today than they were 5-10 years ago.
The median for a $1-2 million portfolio, when you add in AUM and other fees, plus the expense ratios of the funds, plus any platform fees, came to 1.5%, and it dropped as portfolios grew larger. Remember the days when brokerage firms were advertising capped all-in fees of 3%?
- Fee-compensated advisors are charging much less than brokers.
The median all-in fee for the brokerage firm reps who participated in my survey, for that same $1-2 million portfolio, was 2.27% – and that didn’t include any commissions they might have earned. For fee-only planning firms, the median AUM fee was 1.40%.
- Advisors don’t know how much of their AUM fees are should be allocated to non-asset-management services like financial planning.
The responses to this question covered the entire spectrum, from 0% out to 95% and everywhere in between. The most common answer was 50%, which seems like a default assumption made by someone who really has no idea how to answer the question.
What I concluded in the report is that a significant number of planning firms are using the AUM model to pay for a significant amount of non-AUM services, but how much is still a mystery to be solved. The fact that so many advisory firms are experimenting with retainers and hourly fees suggests that the profession is in the early years of figuring this out.
- “Reasonable” fees are higher than you think.
When I applied the percentage allocations from the previous question to the AUM percentages, and multiplied that by the size of the portfolio (translating the percentages into dollar terms), the average AUM fee for a $1.5 million portfolio came to more than $6,500, and the average cost for planning services came to $6,175. I think most advisors believe that annual planning fees above $5,000 is excessive unless they’re dealing with a complicated case, and few $1.5 million AUM clients are asking for estate and charitable planning on a large scale. Meanwhile, roughly 30% of the respondents are charging at or more than the 1% industry standard AUM fee, which makes you wonder about all the talk about fee compression in the profession.
Few advisory firms were charging fees that high for both types of services. But if you’re looking for reasonable fees, it appears that anything below 1.5%, with or without retainers added in, would pass regulatory muster if you cite this study as evidence of typical practices in the marketplace
You can download the full report yourself (here). I included some explanatory text, but it’s mostly charts and graphs, on the theory that you are well able to draw your own conclusions from the (nicely-formatted) data. You’ll be surprised by what you see. And I have a strong suspicion that many of you, reading this, will realize that your own fees are below average – and certainly in the “reasonable” ranges that define themselves from the graphics.
Bob Veres' Inside Information service is the best practice management, marketing, client service resource for financial services professionals. Check out his blog at: www.bobveres.com. Or check out his Insider's Forum Conference (for 2017 in Nashville, TN) at www.insidersforum.com.
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An earlier version of this article contained an error in section 7 (on reasonable fees). This was corrected at 1:11pmET on 7/20/17.
