The trend toward fee transparency may squeeze small firms while leaving larger ones just slightly pinched
As US President Trump’s administration goes on a deregulation tear, a Department of Labor (DOL) rule calling for transparency in retirement fees could be delayed until June or scrapped altogether. Nevertheless, it is clear that clients are demanding more intelligible fee reporting, and Merrill Lynch recently started breaking down fees for its money-management products and services.
“[I]t could put a lot of pressure on other wirehouses,” Bevin Crodian, head of Fincastle Consulting, told Financial Advisor IQ. “But it will really put a lot of pressure on the independent channel, where fees tend to be much higher with much less disclosure.”
“It has called attention to the fact that fees may be too high — and that clients have a right to know what those fees are,” Crodian said. Meanwhile, low-cost passive investments and robo-advisors are undercutting fund-company margins, leading clients to believe that fees can be much lower.
The twin pressures of demand for fee disclosure and lower-cost passive investments will escalate the price war among wealth firms – a conflict in which wirehouses will have an advantage over smaller rivals.
A built-in custody function, along with economies of scale that allow technological innovation and survival through retrenchment periods, will let larger firms “deliver the total cost of client ownership much more cost-effectively than the independents can,” according to Crodian. As a result, the exodus of wirehouse FAs into smaller channels could be softened – but not totally reversed, he added.
“There are too many arguments in favour of independence for that,” he said. “But when you start adding up the costs of bundling and unbundling fees, it’s hard for independents to rival what the wirehouses could start to do.”
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Is the fee price war building up to a bigger battle?
Cost containment a priority for Canadian wealth managers
“[I]t could put a lot of pressure on other wirehouses,” Bevin Crodian, head of Fincastle Consulting, told Financial Advisor IQ. “But it will really put a lot of pressure on the independent channel, where fees tend to be much higher with much less disclosure.”
“It has called attention to the fact that fees may be too high — and that clients have a right to know what those fees are,” Crodian said. Meanwhile, low-cost passive investments and robo-advisors are undercutting fund-company margins, leading clients to believe that fees can be much lower.
The twin pressures of demand for fee disclosure and lower-cost passive investments will escalate the price war among wealth firms – a conflict in which wirehouses will have an advantage over smaller rivals.
A built-in custody function, along with economies of scale that allow technological innovation and survival through retrenchment periods, will let larger firms “deliver the total cost of client ownership much more cost-effectively than the independents can,” according to Crodian. As a result, the exodus of wirehouse FAs into smaller channels could be softened – but not totally reversed, he added.
“There are too many arguments in favour of independence for that,” he said. “But when you start adding up the costs of bundling and unbundling fees, it’s hard for independents to rival what the wirehouses could start to do.”
Related stories:
Is the fee price war building up to a bigger battle?
Cost containment a priority for Canadian wealth managers
