Explicit fees charged for managed accounts are pretty much resistant to compression, according to new research from consultant Cerulli Associates. In addition, there's still disagreement within the industry about whether consumers actually understand the fees they pay.
With the exception of unified managed accounts, Cerulli found that explicit fees charged for managed accounts — sub-advisory separate accounts, mutual fund accounts, rep-as-portfolio-manager, and rep-as-advisor accounts — haven't changed much between 2008 and 2014, with only a 3-to-6-basis-point variation. Under the surface, however, Cerulli said, "the way in which the total fee is carved up and shared among the advisor, sponsor, and money manager has not."
UMAs are another matter, however, with direct-to-consumer firms entering the market and driving down the cost of such accounts by 20 basis points. In addition, direct-to-consumer marketing keeps consumers very aware of costs, which has exerted substantial downward pressure on prices.
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While consumers still appear to be confused by the fees they pay for accounts — including how, or whether, they actually pay for investment advice — a number of factors are coming into play, educating consumers on the true cost of the accounts they hold.
With managed account sponsors working to reduce the level of embedded fees by increasingly turning to ETFs and institutional share classes, consumers are becoming more aware of those fees — something they were previously somewhat in the dark about. Consumers have often failed to understand the complete cost of ownership of an account because of their ignorance about embedded fees.
Electronic RIAs, also known as robo-advisors, could be hitting that ignorance where it hurts, especially for millennials, and becoming a force to further depress prices. According to the report, some robos will aggregate a client's holdings, "identifying expensive mutual funds and suggesting lower-cost alternatives. The advisory fee that eRIAs charge hovers close to 25 bps or lower."
With the entry of Schwab into the eRIA market, with an eRIA that charges no advisory fee, the growing popularity of such options—particularly among millennials—could force managed account prices still lower.
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