Productivity for US registered investment advisors is at the highest level for half a decade but discounting of fees in a competitive landscape is squeezing revenue growth, a study shows.

Revenue growth of US registered investment advisors has fallen to the weakest pace in five years, with two-thirds of RIAs offering fee discounts, a study finds, suggesting pressures continue across the wealth management ecosphere, forcing firms to drive up productivity and embrace digital solutions.

Against such a backdrop, 33 per cent of RIAS want to put in place digital solutions for their business over the next 18 months, according to the Fidelity RIA Benchmarking Study, issued by Fidelity Clearing & Custody Solutions, a unit of Fidelity Investments serving organizations such as advisors, banks and family offices.

The report contains some positive news: productivity is at or near its highest level in five years with assets under management per client remaining steady at $1.1 million, and assets per advisor and clients per advisor up 11 per cent. RIAs have improved productivity to maintain profit margins but are also starting to look to more transformative, longer-term initiatives like digital solutions and client segmentation to deliver value.

New regulations, such as the DoL Fiduciary Rule and changing client demands mean advisors aren’t having an easy market, even though equities have powered higher in 2017. The study said RIA revenue yield has dropped 3 basis points, revenue growth has fallen to 7 per cent and client growth is down to 5 per cent, the lowest level in five years.

Some 64 per cent of RIAs are offering discounts on their fees, and RIAs are starting to formally unbundle their fee structures. In other areas, there has been a 57 per cent increase in the number of RIAs naming client segmentation as a top focus area, the study finds.

“While discounting can contribute to revenue yield erosion, some erosion can be expected against the backdrop of new strategies increasing scale and driving down the cost of business,” David Canter, head of the RIA segment for Fidelity Clearing & Custody Solutions, said. “With revenue and client growth dropping, RIA firm leaders will have to ensure that they make up in volume what they are discounting in fees. But, discounting could signal that RIAs are bridging to the practice of unbundled fee structures, which may help to attract fee-sensitive clients, align services with value and protect against the commoditization of investment management,” Canter continued.

As reported by this news service, there has been a trend of RIAs signing up to platforms and networks to obtain support and services. The RIA sector remains highly fractured. According to a report in November by Cerulli Asociates, the analytics firm, a total of 687 retail-focused advisory firms in the US have reached the $1.0 billion mark for assets under management but in total make up a modest (3.8 per cent) share of all such businesses in the sector. Such data suggests a market ripe for consolidation. Another issue flagged by Cerulli and others is a rise in the average age of advisors, which is an issue as the sector addresses an estimated $30 trillion of wealth transfer in coming years by Baby Boomers.

Core fees
RIAs are not reducing stated prices, as core bps fees across all firm sizes have remained stable; instead, the study found that RIAs are discounting their fees: 64 per cent of RIAs are discounting their fees, showing a gap between their expected and actual bps, the study continued. Mid-size and larger firms are more likely to be discounters, with 79 per cent of firms with $500-$999 million in assets offering discounts compared to 57 per cent of firms with $50M-$99 million of assets.

The average discount across all firm sizes is 21 bps, but the discount jumps up to 28 bps for firms with more than $1 billion in assets. Discounters set fees 10bps-15bps higher than other firms for clients $2 million and above, but then appear to negotiate lower fees across the board.

“The changing landscape means firms must evolve and find ways to deliver value in new, meaningful ways. Currently, 41 per cent of investors would be more likely to work with a financial advisor if their fees were lower,” the study said.

Other ways to prosper
In addition to discounting, which can be seen as an ad hoc unbundling of services, RIAs are also starting to formally unbundle their offerings. The study found that unbundling is taking place across all services, namely: retirement plan services (15 per cent fewer), trust services (14 per cent fewer) and investment management (10 per cent fewer).

Some 41 per cent of RIAs are considering or already using a digital solution; 33 per cent are looking to implement a digital solution in the next 18 months. Digital solution users work with nearly 3 times the number of clients as non-users (566 vs. 202), have 2.5X higher assets under management ($533 million vs. $209 million) and 3X the revenue ($4.2 million vs. $1.4 million).