The findings in this blog post come from our annual survey of over 1,350 registered investment adviser ("RIA") firms that was conducted in the first quarter of 2019. This proprietary RIA in a Box study is paired with publicly accessible data provided by the Securities and Exchange Commission ("SEC"). The goal of our 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. In this blog post, we focus on the advisory and total fees charged by RIA firms. Over the past three years, we have expanded our study to include not only the advisory fee charged, but also the total fee charged to client which would is intended to account for underlying investment product or third-party management fees. The focus of this blog post is on the advisory fee charged directly by the RIA firm. We'll take a look at total fees charged in a future blog post.
While the drumbeat around potential investment adviser industry fee compression seems to get louder each year, this year's survey findings closely mirror our findings from recent years with an average advisory fee of 0.96%:
The advisory fee of 0.96% is up slightly from our 2018 survey results which showed an average advisory fee of 0.95%. In general, advisory fees charged by RIA firms have held steady in recent years. It is interesting to note that the median advisory fee charged at 0.98% is 23.2% is also close to in-line with the average advisory fee. The largest concentration of firms (~25%) charge advisory fees between 0.96 and 1.00%. There is a "longer tail" of firms charging advisory fees which are materially higher than the average advisory fee of 0.96% but the median and average still converge together given the large concentration of firms charging close to the industry average advisory fee.
Average Advisory Fees Charged Based on In-House vs. Outsourced Portfolio Management
We next explored advisory fees charged by RIA firms that manage client investment portfolios directly (in-house) or instead outsource portfolio management to a third party. The survey results revealed that firms utilizing in-house portfolio management charge an average advisory fee of 0.98% compared to 0.90% for firms that outsource portfolio management:
Given the additional fees generally associated with third party portfolio management, it makes sense that the average advisory fees charged directly by an RIA firm that outsources portfolio management are lower than firms that manage portfolio management in-house. However, the largest concentration of advisory fees charged, whether the firm manages client portfolios internally or externally, continues to be in the 0.96% to 1.00% range. In a future blog post, we will further explore the total fees charged to a client when looking at in-house compared to outsourced portfolio management.
Average Advisory Fees Charged Based on Active vs. Passive Portfolio Management Style
Next, we explored advisory fees charged by RIA firms that manage client portfolios with an active, passive, or hybrid (both) management style. An active management approach generally implies buying and selling securities with the intent of outperforming an investment benchmark index. A passive management approach generally implies utilizing index funds or similar investment vehicles such as exchange-traded funds with the intent of mirroring an investment benchmark index.
The survey results revealed that firms that employ an active portfolio management style charge an average advisory fee of 1.08% compared to firms which employ a passive portfolio management style charge an average advisory fee of 0.83%. In addition, firms that utilize both active and passive management portfolio management styles charge an average advisory fee of 0.95%:
Firms that deploy an exclusively active investment management style charge an average advisory fee 23.1% greater than firms that deploy an exclusively passive investment management style. The general argument for the additional advisory fee charged would be that the active portfolio management style should outperform a passive portfolio management style tracking an index and thus justify the higher average advisory fee. Unfortunately, our survey does not look at client portfolio performance relative to advisory fees charged.
It is interest to note that the largest concentration of advisory fees charged by firms utilizing an exclusively active management style is in the 0.96% to 1.00% range. On the other hand, the largest concentration of advisory fees charged by firms utilizing exclusively passive or hybrid management styles are both in the 1.01% to 1.05% range. Thus, it would appear that the average advisory fee for firms deploying an active management style is a bit skewed by the 18.7% of firms charging advisory fees above 1.45%. In a future blog post, we will further explore the total fees charged to a client when looking at active versus passive portfolio management styles.
Average Advisory Fees Charged Based on Type of Investment Securities
Lastly, we explored advisory fees charged by RIA firms that manage client portfolios primarily with exchange traded funds (ETFs), individual securities (e.g. stock picking), or mutual funds. The survey results revealed that firms that primarily utilize individual securities charge an average advisory fee of 1.04% compared to 0.96% for firms that primarily invest with ETFs and 0.88% for firms that primarily use mutual funds:
One of the key drivers of the relatively lower average advisory fee charged by RIA firms primarily utilizing mutual funds is that less than 4.5% of firms that use mutual funds charge an advisory fee over 1.30% compared to over 75% of firms using mutual funds that charge an advisory fee of 1.00% or less. On the other hand, over 19.8% of firms that utilize individual securities charge an advisory fee greater than 1.30% and 10.7% of firms that use ETFS charge an advisory fee over 1.30%.
RIA firms that use individual security selection charge an average advisory fee 18.2% greater than firms that utilize mutual funds and 8.3% greater than firms that deploy exchange traded funds. It is likely that the vast majority of advisory firms using individual securities likely also deploy an active portfolio management style which may account for the higher average advisory fee. It's also possible that firms that utilize third-party investment products, such as mutual funds or ETFs, may also be accounting for the additional total all-in fee charged to the client due to the third-party product fees by charging a reduced advisory fee. In a future blog post, we will further explore the total fees charged to a client when looking at the primary type of investment security utilized.
Be sure to check back soon as we analyze how these same investment adviser investment decisions related to portfolio management and security selection also impact to the total all-in fee charged to client.