Advisory firms best able to weather fee pressures

Advisory firms are the only part of the investment value chain to escape fee pressure, according to a global report.

The report ‘Scalable tech and operations in wealth and asset management’ from platform FNZ and Boston Consulting Group surveyed around 100 firms globally, including Australia, and found the margin for advisory fees had remained steady at 72 bps between 2017 and 2022. 

This compared to fee pressures in fund management with a fall of 11 per cent from 140 bps to 125 bps over the same period for active funds and a 35 per cent fall from 31 bps to 20 bps for passive funds. 

The report said: “Wealth and asset managers are facing continuous margin compression driven by several trends: the increasing share of passive investments, rising competition from digital players, and the consolidation of large incumbents with significant scale advantages (especially in asset management). 

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“As a result, return on assets (ROA) fell by 3 per cent per year across both asset and wealth management from 2018 through 2021. Furthermore, observing the investing value chain, it is clear that while advisory fees have remained relatively stable, product fees have been hit by fierce competition and increased cost transparency — with declines of 11 per cent for active funds and 35 per cent for passive funds since 2017.”

On model portfolio services (MPS), the margin had fallen by 12 per cent from 27 bps to 24 bps between 2017 and 2022. 

MPSs, in particular, were namechecked by the report as an area of future growth as firms look to deliver personalised options for their clients. Under a traditional asset management model, client fees were 170 bps but fell to 150 bps when an adviser used an open wealth platform with MPSs, the report said.

They also allow wealth managers to avoid reliance on strategies provided by asset managers that mean they could keep a larger share of client fees. They could also rely on low-cost funds as underlying investments for the MPS that attract higher volumes of clients.

“Overall, we expect further growth in MPS as banks and wealth managers look to benefit from delivering more-personalised discretionary services to their affluent and high-net-worth clients at lower cost to serve,” the report said.

“In markets with developing investment management industries, model portfolios provided by global asset managers can help local wealth managers achieve a higher degree of differentiation.”

BCG and FNZ noted client demands were intensifying along the value chain that is requiring asset and wealth managers to make further investments in their businesses. 

One of the areas with the expected greatest outlay is the move to “hybrid advisory supported by seamless omnichannel capabilities” as well as managed portfolio services that allow for higher levels of personalisation.

Clients are also demanding greater transparency of investment holdings to ensure they are aligned with their personal values and goals.