Managed Accounts Show Little Fee Compression

A new report from Cerulli Associates explores one of the most frequently asked-about issues among the firm’s clients: Why has there been very little price change in the explicit fees consumers pay for managed accounts?

“Within the managed accounts practice at Cerulli, the questions most frequently asked by our clients relate to fees,” explains Tom O’Shea, associate director at Cerulli. “Since 2008, there has been very little price change in the explicit fees that consumers pay for subadvisory separate accounts, mutual fund accounts, rep-as-portfolio-manager services, and rep-as-adviser accounts.”

According to Cerulli, the explicit costs of all types of managed account programs, with the exception of unified managed accounts (UMAs), varied only three to six basis points between 2008 and 2014. In a sharp contrast, the explicit fee for UMAs dropped 20 basis points during the same time period. 

O’Shea notes Cerulli began tracking fees for UMAs in 2007, when the product category was fairly new and saw little competition between providers. “Since then, several firms have entered the space, including direct-to-consumer firms, which have driven down the explicit cost of UMAs,” he explains.

The Cerulli research indicates managed account clients are often confused by the fees they pay for advice—one potential explanation for why prices have remained steady—though the wider industry trend is toward greater understanding of the cost of advice. Interestingly, a 2014 survey by the firm shows 51% of consumers “were not sure how they paid for investment advice or thought they did not pay for it,” down from a high of 64% in 2010.

O’Shea feels new entrants into the managed account space “might heighten consumers’ sensitivity to fees,” and thereby kickstart more fee compression beyond the UMA category.

“Perhaps the most intriguing and powerful force to open clients’ eyes to the cost of investing has been electronic [registered investment advisers], or robo-advisers as they are dubbed in the trade press,” he says. “As these alternative approaches to financial advice grow in popularity, especially with the Millennial generation, they could slowly destabilize the equilibrium price for managed accounts.”