Fees at a Crossroads Revisited: Why Raef is Still Wrong

Jul 26, 2018

 

Three years ago I wrote a post that still has my favorite title:  Advisor Fees at a Crossroads:  Why Raef is Wrong. It described a debate about advisory fees that my friend and colleague Raef Lee and I often discuss (sometimes loudly). In his earlier post, Advisor Fees at a Crossroads: Has AUM Reached a Dead End?, Raef advocated for the status quo and the “ubiquitous 100 basis point (BPS) AUM model.” He thought advisors benefit from the simplicity and non-transparent nature of the AUM model. Meanwhile, I advocated for alternative fee models.

What has changed?

As you may know, this week we are launching the follow up to our most important and popular paper Fees at a Crossroads. The new paper, Fees at a Crossroads Revisited (I call it just “Revisited”) is an updated look at the challenging fee landscape for advisors. For Revisited, we dig deep with data collected from 736 advisory firms and over 900 US consumers to look at evolving trends. We interviewed three firms putting innovative fee models to work, and shared key takeaways from our research.  As with the last paper, Bob Veres provided commentary, and we wind up with key suggestions for advisors who want to close the fee vs. value gap.

In the three years since the last paper, a lot has changed.  According to a recent study by the Cerulli and Associates in partnership with the Investment and Wealth Institute (formally IMCA), there has been a big increase of asset based compensation. In fact, the study suggests that by 2019 two-thirds of advisors will be compensated by asset-based fees.

At the time of the first paper, we highlighted transparency of fees as one of the main drivers of the behavior by both advisors and clients, as well as the disconnect between the two groups about online tools/advice vs. advisor services. We also noted that many clients still didn’t know how their advisor is compensated.

Is Raef Wrong?

Yes and no. If you look at the current trends, you could say that Raef’s vison of the future back in 2015 (increasing AUM compensation) is winning.  Advisors have been using, and likely will continue to use the AUM model as the primary source of compensation for the foreseeable future. It’s a frictionless compensation model, easy to explain to clients when they hire the advisor, can be easily automated and thus forgotten going forward. Set it and forget it – there is something to be said about making it easy.

Maybe I give the clients too much credit, but as the industry continues to move further from commission to fees for advice, I think the consumers will start to push back even more. To me, 100 BPS based on how much money someone has is just a made up number. It’s not based on a real value that the client places value on or receives. Some clients will be underserved, some overserved, and the underserved will probably seek another advisor. I imagine that the pushback will be slow and subtle. The robos and the virtual advisors have started the conversation about (limited) advice and they think it is worth 25 – 30 BPS. It is easy to see a future where their business model will likely dominate the pricing discussions.

Not yet, but choose for yourself

If you have to call a winner today, Raef is probably it. However, I play the long game. My bet is still on alternative compensation methods like retainer or hourly fees, etc.

The better question is: what do you think? Download our newest paper Fees at a Crossroads Revisited and tell us what you think. Team Raef or Team John?

Bob Veres is not affilitated with SEI or its subsidiaries.

Share Button
John Anderson

John Anderson

John Anderson is the creator and lead author of Practically Speaking blog and Managing Director of Practice Management Solutions for the SEI Advisor Network.

Learn More About John Anderson

Subscribe

Categories

Recent Tweets