This is the sixth of a series of blog posts that provide select insights from our 2016 Registered Investment Adviser (RIA) Industry Overview Report. This proprietary RIA in a Box study used detailed survey responses from 1,198 advisory firms paired with publicly accessible data provided on the Securities and Exchange (SEC) website.* The goal of this annual study is to understand different options that comprise each firm characteristic, and to determine whether specific characteristics affect the growth, size, or operational efficiency of an RIA firm.
Latest Average RIA Investment Advisory Fees
Last year's 2015 survey showed that RIA firms charge 1.03% average annual client advisory fee. This year, the average investment advisory fee charged by firms was 0.99% with 80% reporting such fees at or below 1.13% and 90% reporting such fees at or below 1.33%. Below is a distribution of all responses:
As has been the case for quite some time, there is still a large concentration of industry advisory fees around 1.00%. Although the average investment advisory fee charged decreased slightly compared to the prior year, we do not believe this is a significant enough decrease to signal actual industry fee compression. This area does deserves further analysis, however, especially if the industry continues to evolve as rapidly as it has in recent years.
Do RIA Firms that use a Passive Portfolio Management Style Charge Lower Fees?
A closer look at the the traits of RIA firms that manage client investment portfolios more actively versus passively also reveals significant impact on advisory fees. Firms that actively manage investment portfolios for clients have an average advisory fee of 1.12% compared to a 0.88% average advisory fee for firms that passively manage investment portfolios. However, it's possible that this average fee difference is even a bit understated. The average account size for RIA firms using a passive portfolio management style is $664,464 compared to $799,053 for firms utilizing an active management portfolio style. In general, advisory fees tend to move upwards as the average client account size decreases. Yet, in this circumstance, firms using a passive portfolio management style have both a lower average account size and lower average advisory fee.
However, it's also important to note that the average investment advisory fees noted above do not likely include underlying investment manager or product fees. Thus, perhaps it's a bit unfair to perform a direct comparison of advisory fees charged by firms using an active investment management style compared to a passive style given that some "actively managed" firms may be directly purchasing and managing individual securities which do not have additional underlying fees. Future studies will look to explore this topic of "all in fees" in more depth.
Do RIA Firms that offer Financial Planning Services Charge Higher Fees?
Our study revealed that 63% of RIA firms offer financial planning services. Investment advisory firms that offer financial planning do not seem to charge a meaningfully different investment advisory fee compared to those that do not. The average advisory fee charged by firms that offer financial planning is 1.00% compared to 1.01% for firms that do not. However, there is an even more pronounced average account size difference for firms that offer financial planning ($712,805) compared to firms that do not ($2,330,446). Given the dramatically lower average account size, one might suspect that firms offering financial planning would by nature be charging higher average fees simply because they are serving smaller clients on average. Yet, the survey's results show this is not the case.
Thus, it's possible that a significant number of RIA firms that offer financial planning services are charging separate financial planning fees rather than bundling such services as part of the total investment advisory fee. This topic will be further explored in future studies to get a better sense of "all in fees."
Do RIA Firms that Aggressively Adopt Technology Charge Different Fees?
Our study showed that 25% of RIA firms have not adopted any advisor-specific technology system compared to 16% of advisory firms that have adopted 4 or more advisor-specific technology systems. However, there is no noticeable difference in the average investment advisory fee charged by a technology laggard (1.02%) compared to a technology evangelist (1.02%). This is also true looking at advisory firm adoption of specific types of technology systems such as customer relationship management (CRM), financial planning, portfolio management and reporting, and document storage.
Therefore, it does not appear that an RIA firm is able to simply "pass along" business technology expenses to clients. However, it is possible that the increased operating efficiency provided by technology adoption allows an advisory firm to still charge the same top-line advisory fee while operating more profitably. Of course, the true return on investment for any given advisor technology system is still up for debate but each year our survey results confirm that RIA firms that aggressively adopt technology are growing assets more under management (AUM) more rapidly and able to serve a larger number of clients.
Be sure to check out our previous posts from our most recent investment adviser industry study:
- RIA Industry Study: Number and Types of Technology Systems Utilized
- RIA Industry Study: The Profile of Firms That Offer Financial Planning
- RIA Industry Study: Outsourced vs. In-House Portfolio Management
- RIA Industry Study: Active and Passive Portfolio Management Styles
- RIA Industry Study: Comparing 2014 and 2015 AUM Growth Rates
Note: The average investment advisory fee charged by the RIA firm may not include additional underlying investment manager or product fees. *Source: SEC and state investment adviser firm reports as of June 8, 2016 available on the SEC Investment Adviser Public Disclosure (IAPD) website.