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In Practice December 15, 2016
RIA Industry Sees Stalling Organic Growth
Data provided by Fidelity shows organic growth among RIA
firms dropped again in 2015; yet there is reluctance to take on major change
in terms of pricing and value proposition.
Reported by John Manganaro
The 2016 Fidelity RIA Benchmarking Study outlines key challenges and opportunities for registered investment advisers (RIAs). Many independent advisers tell Fidelity their business is facing a period of unprecedented change, driven by numerous forces.
Among the more than 400 RIA firms surveyed, there is clearly a “persistent organic growth challenge,” Fidelity reports. Organic growth dropped to 6.7% in 2015, the lowest level in the last five years.
“In this context, firms have prioritized marketing and business development, but they lack a strategic focus on pricing, which may prove costly, “ Fidelity warns. “Median revenue yield dropped 4 basis points to 69 bps in 2015 after years of stability.”
Analysis of study results uncovered three key pricing myths that appear to be contributing to pricing inertia among RIAs, Fidelity says. First, many RIAs still believe traditional commission-based pricing models do not need to change because they have worked in the past; second, many RIAs mistakenly believe their pricing models are simple and easy to understand from the perspective of clients or partnering providers; finally, RIAs for the most part remain convinced their pricing models closely reflect the value provided.
Fidelity warns that advisers cannot take any of these notions for granted. Yet only one in five firms regularly review their pricing models, and specific plans for change are limited. This is despite the fact that industry sales and compliance experts have warned that dramatic change is in store both due to the Department of Labor (DOL) fiduciary rule and general client interest in improved transparency.
“The tremendous variation in offerings and fee models across firms creates major challenges for investors interested in comparing RIAs,” Fidelity explains, noting that the top driver determining an RIA’s pricing approach should be “a deep understanding of value delivered.”
The Fidelity survey further suggests “there is a misalignment between offerings, pricing, and delivery … Segmentation, unbundling, and use of minimum fees are key opportunities.”
NEXT: What RIAs are saying as 2016 closes
According to Fidelity, the majority of variation in total assets under management (AUM) growth among RIAs is driven by investment performance; organic growth has been consistently below 10%. Leading into this year’s study, both investment performance and total AUM have been on the decline since 2013.
Fidelity researchers were surprised that this challenging environment, both from the regulatory and performance perspective, is only inspiring 9% of RIA firms to consider deep changes to their fee or pricing structures. They argue that more and more firms will have to move down this path to stay competitive in the industry—and the longer the delay, the greater the pain.
“Seventy-three percent of high-earning Millennials who don’t currently have an adviser agreed with the statement, ‘I would be more likely to work with a financial adviser if fees were lower,’” the report highlights. “Given the trends impacting the industry, Fidelity anticipated that firms would be seeking to adapt across all areas of their business including the way they charge for their services. When it comes to pricing and fees, however, what we see is inertia.”
Among the factors driving a need for RIA pricing evolution, Fidelity points to the increasing commoditization of investment management; increasing value placed on all types of planning, beyond just stock/mutual fund picks; increasing influence of newer, younger clients; advancements in available investment management technology; changes in the regulatory environment; and many others. The impact of "robo" and digital advisers on both investors and firms; ongoing industry consolidation leading to the creation of larger firms; the aging adviser population, with a very pressing need for younger advisers to take on higher level leadership roles all put pressure on RIAs to adapt and reform their businesses.
The full 2016 Fidelity RIA Benchmarking Study is available for download here.