Advice is bucking the general fee compression trend in financial services with professional planners still maintaining pricing power, according to a new US study.
The Investments & Wealth Institute (IWI) study found average financial advice fees increased across most tiers over 2018 to 2020 regardless of the charging model.
“Overall, we do not see much evidence of fee compression,” the report says. “In fact, the median standalone financial planning fee was up 12 percent from 2018, the median retainer fee was up 25 percent, and the median hourly fee was up 25 percent.”
Fees at the low-end of the market also rose between 17 to 33 per cent during the same period with only top-tier advice costs falling “slightly”.
“The range of advice fees decreased top to bottom, but the minimum and median fees that advisors charged were up significantly from 2018 to 2020,” the paper says.
Based on a survey of more than 800 financial advisers in the US, the study says planning fees have continued to rise even in the face of a decade-old robo-advice trend and the ongoing “growth of lower-cost advisory platforms”.
Furthermore, the ‘Financial advisor fee trends and the fee compression mirage’ report found most advisory firms charge based on either assets under management (AUM) only or with additional “retainer, hourly or project” fees in the mix.
“Commission compensation remains a secondary form of compensation, if advisors receive it all; only 1.1 percent of advisors in our sample were compensated entirely by commissions,” the study says.
AUM-based fee models proved the most lucrative with implied hourly rates of between US$350-$800 compared to US$100-$300 for those who charge exclusively by the hour.
“Top-earning advisors, however, are generating implied hourly fees of [US]$950-$1,600,” the IWI report says.
While the survey found “retainer and subscription-based” financial planning models were increasingly common, the AUM approach remains the most popular in spite of its perceived flaws.
“The AUM model often is criticized because clients with twice the assets to manage may pay twice the fee but don’t necessarily require twice the work,” the paper says. “Our data shows, however, that advisors consistently use graduated fee schedules with breakpoints, i.e, lower AUM fees at higher thresholds, that partially mitigate this effect.”
Authored by Derek Tharp – lead researcher with the advice consultancy business, Kitces, and University of Southern Maine assistant professor of finance – the study canvassed advisory business models ranging from sole operators to “ensemble” groups with variation both between and within the different cohorts depending on practice details (such as target niche, use of technology and support staff).
“… the most successful advisors appear to be serving a deeper, more targeted niche where they can charge higher fees without needing to do the most comprehensive and time-consuming financial plans,” the report says.