Fee compression in asset and wealth management has been a hot topic this year, as downward pressure on fees continues eating into RIA profit margins.
According to Cerulli Associates, asset managers have seen the average, asset-weighted fee for a U.S. equity fund fall from 85 basis points in 2012 to 72 bps in 2017, a nearly 10% annual drop. The average taxable fixed-income product fee declined from 66 bps to 55 bps, a 13% annualized drop during the same period.
Although maintaining higher margins will be a challenge, the financial services industry is still growing.
Here are some of the findings from WealthManagement for 2017 (compared to 2016):
- RIA total assets under management have increased by 20%.
- Firms saw a median 15.8% rise in revenue.
- Advisories saw an 8% increase in revenue for each “revenue generating” role.
- RIAs saw a median 7.8% increase in new clients.
But increased assets and revenues are meaningless until you know the liabilities and expenses.
Otherwise, it’s like concluding someone’s house is clean without opening their closet door and seeing all the junk piled up.
And sure enough, rising costs have accompanied a growth in revenue:
- Profit margins for RIA’s fell below 19% compared to 25% the previous year.
- Firms experiencing the most growth recorded the lowest profit margins.
Having a strategy to combat the rising costs is key to your investment advisory firm’s success.
How to Keep Profits When Facing Fee Compression in Asset Management
New Portfolio Accounting Software
Some portfolio accounting systems (PAS) are really expensive and/or not user-friendly. Switching to a more budget-friendly software is always an option, assuming it’s easy enough for use.
But if you move to a more expensive PAS that is user-friendly, you could end up saving time (and therefore money) in the long run by using a system that allows you to finish the work faster.
If you can find a software with the right mix of friendliness to your budget and the user, you’re going in the right direction.
RPA (Robotics Process Automation) is a great way to improve operational efficiency and reduce costs, as Accenture detailed in a report.
A “robot” can perform functions related to trading, reporting, fund administration, managing taxes, etc., so you don’t have to. In the end, you get higher data accuracy, improved quality and output.
Also, our previous blog explains how investment managers can benefit from a range of new automation tools.
Employee Versatility and Retention
Train existing staff to learn each other’s work, wherever applicable. The last thing you want is an employee with all of the know-how to leave. Who will get the work done? How long will it take to find a replacement?
According to Capital One, it costs a firm 29% to 46% of the departed employee’s salary to find a replacement. That means losing an employee with an annual salary of $50,000 will cost you between $14,500 and $23,000.
The costs include activities associated with hiring and training, as well as lost productivity while looking to fill the vacant spot. What is not included are the variable costs, which are those related to a loss of clients as a result of the employee’s departure. If you lost a key employee employee who knew “everything”, the variable costs will be higher.
Developing a depth chart will reduce operational risk, as you have capable replacements in case someone leaves. But don’t just prepare for employee turnover; take steps to prevent turnover.
The fact that RIA hiring has increased 7.4% reflects the trend of an overall healthier economy, and with more job openings, employers are competing with each other, seeking and “poaching” top
talent. Following employee retention best practices will keep your firm competitive and attractive to the best job candidates.
Middle- and Back-Office Outsourcing
It might be difficult to leverage your portfolio accounting system and implement new and automated technology on your own. In addition, developing a comprehensive strategy to deal with turnover is easier said than done.
To varying extents, implementing the three solutions mentioned above can all be done through outsourcing, which can reduce operational costs between 25% and 50%.
Asset management outsourcing specialists can handle your portfolio accounting system, perform your reconciliation, reporting and billing, and they have the resources and know-how to implement
automated technology to improve workflow efficiency.
In regards to your middle- and back-office operations, asset management outsourcing companies can solve your employee turnover problem by providing you with a team of portfolio accounting experts, rather than you expending resources to recruit, hire, and train new staff members.
Based on your firm’s needs, the outsourcing provider will supply you with the right amount of back-office talent to get the job done efficiently and cost-effectively.
Handling Asset Management Fee Compression
Even though the financial services industry has grown in terms of total AUM, revenue, and clients, fee compression will continue eating into RIA profit margins.
Reaping the benefits of industry growth will require cost-cutting yet effective measures, which include leveraging (new) portfolio accounting software and automated technology. Turnover will be a problem, so taking measures to train backups and retain your staff are important.
Outsourcing will be another effective way to lower costs. Not only will costs go down, but operational performance will improve because back-office outsourcing firms will leverage your portfolio accounting software, provide automated technology solutions, and address your turnover issues.
Threats to business will always exist, but having practical solutions in place to deal with fee
compression will not only help advisories survive, but thrive.
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