Fidelity's Custodial Report on RIA Fees December 18th 2017

Good morning

Fidelity just released a report this morning from their Clearing & Custody Solutions division on what they are seeing as it pertains to RIA Pricing, aka fee compression, in 2017.

Several interesting facts. First below the headline before the article starts is the line below stating that advisers are unbundling fees for financial planning. This has long been a basic tenet of PFGC philosophy. As fees compress we will want a transparent pricing model so we can charge for wealth management services.  If this is true then Designations and Centers of Expertise will have to be an important part of our business model.

The impact of robo-advice is driving more advisers to unbundle fees to highlight the value of planning

Next with markets at all time highs and the biggest and longest bull market in history the average revenue per RIA dropped 4%. This can not be a good sign. 

Meanwhile, annual revenue per adviser dropped to $538,00, down from $561,000 a year earlier.

PFGC believes that our fees will decline but that we are far more valuable than a robo if we can change our investment process, scale it and most importantly articulate it. 

"The unbundling is driven by the robos providing asset management for a very low fee, and that makes it apparent to clients that the asset management is the lowest value provided to them," 

PFGC has had a target of 50 to 60 basis points for our fees in the next 5 years. The Fidelity Research, below, shows we are well on our way. If we are going to be charging a fee of 60 bips for an average account than I think we can assume larger accounts are going to be lower, maybe 25 to 30 bips.

The research found a median fee gap between stated and actual fees of 21 basis points, with actual fees charged across all clients averaging around 64 basis points.

PFGC believes in connecting the dots. 

• If our fees goes down we will need to manage a lot more assets to maintain our lifestyles
• To manage a lot more, think a billion, then we will have to employ a standardized investment process, think models, so we can efficiently and effectively manage our client's assets
• If you are going to build a model PFGC believes the model will have to be low cost and tax efficient with much better performance than we have delivered in the past.
• If you run a standard model then Metrics will be incredibly important
• If we are paid less, asset management as a low valued offering, then we will have to incorporate wealth management into business model. REAL WEALTH MANAGEMENT!
• Charging a fee for Wealth Management means that we can add value and clients will want to know why they should pay us for Wealth Management advice.
• That means designations will be critical for our ability to charge for wealth management advice
• To deliver a wealth management offering we first must know all the needs and goals of our clients so developing an in depth Discovery Process is essential.
• If we do the Discovery and understand our client's needs and goals we will be forced to incorporate Centers of Expertise into our business model so we can meet the needs and goals of our clients.
• If we want to incorporate multiple Centers of Expertise, SO WE CAN GET PAID, then we need to standardized our interaction with Centers of Expertise.
• Finally we must move to a business model that that has a standardized Business Development Process.  The main business driver to grow our businesses is new relationships not performance.

As a Financial Advisor we must become "the tip of the spear". This means all our functions, teaming, strategic partnering, affiliations must be designed to get us in front of new prospects.

                  All assets are good assets, any relationship is better than all assets. 

https://www.fa-mag.com/news/ria-fees-and-revenues-down--fidelity-says-36223.html

http://www.investmentnews.com/article/20171218/FREE/171219933/fidelity-report-says-rias-are-cutting-fees-working-harder

Danny

"One left-footed step per day"

Disruption of our Business Model

Michael Kitces email today addresses what PFGC has maintained for several years, our business model is being disrupted as the fees for AUM is declining. PFGC believes that fee compression is accelerating as the adoption rate for ETFS is accelerating. Kitces speaks of several different possible outcomes including that we give away for free managing investments while charging for wealth management advice. What Kitces fails to mention is that wealth management is a spotty proposition in that I doubt we could charge a fee every year as we do for AUM. Just saying we service your wealth management needs for fee and give you AUM advice for free doesn't feel like it would hold up to scrutiny. 

https://www.kitces.com/blog/cross-subsidy-industry-disruption-financial-advisors-bps-custody-indexing-2-0/?utm_source=rss&utm_medium=rss&utm_campaign=cross-subsidy-industry-disruption-financial-advisors-bps-custody-indexing-2-0&utm_source=Nerd%E2%80%99s+Eye+View+%7C+Kitces.com&utm_campaign=76c679cec8-NEV_MAILCHIMP_LIST&utm_medium=email&utm_term=0_4c81298299-76c679cec8-57148589

PFGC doesn't believe in an either or world or future. ETFs are simple, diversified and low cost but as PFGC points out in the Retention/Attrition Strategies webinar  we can still, will and do add value. Link is below.

https://attendee.gotowebinar.com/recording/611154028166285059

What PFGC has great clarity on is that whatever the outcome our fees will be lower, much lower. So a standardization of all our business processes is necessity so we can manage a lot more assets as we move to add wealth management to our offering.

I realize a lot of us consider ourselves wealth managers but the litmus test for PFGC is are we willing to move to a model like CPAs and Estate Lawyers where we are paid by the hour for our advice? I think not. We could do it but I doubt we would be paid at the same level we are today. Yes we do offer some aspects of wealth management but I believe we are many iterations of our business model away from not only claiming to be wealth managers but are licensed, certified and trained to deliver that offering.

Whatever the end game we will not leap to the conclusion. We need to concentrate on next steps in both managing AUM and adding wealth management capabilities and not worry about the ultimate endgame. Don't worry what you can't control/influence but concentrate on what we can change.

"one left-footed step per day" is PFGC's attempt to focus on the art of the possible and not on the impossible.

Danny