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. Last week, we discussed how this year's survey findings closely mirror our findings from recent years with the average advisory fee charged at 0.96%. The focus of this blog post is to explore the total average total fees an investment advisory firm charges, including advisory fees and all underlying investment product or manager fees.
This year’s average total advisory fee including all underlying investment product of manager fees is 1.17% This is a slight decrease from last year's average total fee of 1.22% Given that the advisory fee charged by RIA firms held relatively steady year over year, it's likely this reduction can be attributed to a combination of investment advisers transitioning clients to lower cost investment products along with a continued decrease in overall investment product costs across the industry. The average total fee of 1.17% exceeds the median total fee charged of ~0.98%. Thus, over half of RIA firms are charging a total fee of less than 1.00%.
Average Total Client Fees Charged Based on In-House vs. Outsourced Portfolio Management
We also looked into the total fees assessed to a client based on whether the firm was managing portfolios directly (in-house) or via third-party (outsourced). Of the 1,010 firms that indicated that they manage portfolios in-house, the largest concentration indicated that they charge a fee of .96-1%. However, the average total fee charged across all respondents who managed portfolios in-house is 1.15% which is slightly below the overall total fee average of 1.17%.
Conversely, of the 258 firms that indicated that they outsource portfolio management, the average total fee charged was higher than those that managed portfolios in-house coming in at 1.26%. In fact, the largest concentration of respondents indicated that they charge between 1.46-1.50% in total fees indicating there are a number of firms which outsource portfolio management with clients that experience significantly higher total all-in fees.
Average Total Client Fees Charged Based on Active vs. Passive Portfolio Management Style
Furthermore, we analyzed total fees charged by firms that are using an active, passive, or hybrid (both active and passive) management portfolio 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 implied utilizing index funds or similar investment vehicles such as exchange-traded funds with the intent of mirroring an investment benchmark index.
The results revealed that firms which deploy an active management style charge the highest total fees at an average of 1.26%. Firms utilizing a hybrid portfolio management style charge an average total fee of 1.19% and firms using a passive portfolio management style charge the lowest total average fee at 1.05%. RIA firms that exclusively use an active management style charge an average total fee 20.0% higher than firms that exclusively use a passive management style.
As it relates to the premium in total fees charged by advisory firms that deploy an active portfolio management style, the general argument for the higher total fees charged would be that the active portfolio management style should outperform a passive portfolio management style tracking an index and thus justify the higher fees. Unfortunately, our survey does not look at client portfolio performance relative to total fees paid by the client.
Average Total Client Fees Charged Based on Type of Investment Securities
Next, we looked at fees charged by firms who primarily manage exchange traded funds (ETFs), individual securities, and mutual funds. RIA firms that that primarily use ETFs or individual securities to implement their investment strategies both charge the same average total fee of 1.14%. Advisory firms that primarily utilize mutual funds charge a higher total average fee of 1.21%.
These results were particularly interesting because on average RIA firms that primarily utilize mutual funds charge a lower average advisory fee than firms that use ETFs or individual securities. Thus, the total fee results indicate that the underlying mutual fund product fees are generally significantly higher relative to ETF or other individual security-related product fees.
Be sure to check back soon as we further analyze the relative advisory fees and total all-in fee charged to client by taking a closer look at underlying product and third party investment management fees.