Strategy & Practice Management
Navigating the Value and Evolution of Financial Advisory Services
The debate over the possibility of zero fees for retirement plan advisors and record keepers remains open, but there's a consensus that fees in this sector are on a downward trend, which is likely to persist.
This trend is driving the merging of wealth management, retirement planning, and employee benefits. Despite this, wealth management fees have consistently stayed around 1%, unaffected by the decreasing asset management fees, which is attributed partly to the shift towards passive investment strategies, says Fred Barstein, founder and CEO of TRAU, TPSU and 401kTV.
The reason behind this stability in wealth management fees, even as others decline, is linked to the perception of value and replaceability. Services or products considered replaceable commodities are likely to see fee reductions. For instance, certain functions, such as fund evaluation, can be outsourced to specialized services, causing fees for such functions to drop. However, when services or products are viewed as valuable and irreplaceable, consumers are more inclined to pay, which explains the resilience of wealth advisory fees.
The pressure on fees in the Defined Contribution (DC) sector can be attributed to various factors, including regulatory scrutiny and litigation under ERISA, as well as strategic missteps by advisors focusing solely on reducing record-keeping costs. Additionally, the industry's shift towards prioritizing participant outcomes and income replacement has highlighted the value of holistic financial planning, which is challenging to replace and thus supports higher fees.
Wealth advisors have adapted by broadening their roles from investment selection to comprehensive financial planning, incorporating behavioral finance, and offering value-added services like estate planning and tax consulting. This evolution allows them to maintain their fees by offering increasingly complex and personalized services.
New services in DC plans, such as support for student loans, emergency savings, and Health Savings Accounts (HSAs), have become more prominent, although their profitability is debated. The emergence of robo-advisors with lower fees challenged traditional models but didn't lead to widespread fee reductions, suggesting that value-added by human advisors remains irreplaceable.
The lessons from the wealth management industry, which has successfully maintained its fee structure while evolving its service offerings, serve as a model for the DC industry. This is evidenced by the growing trend of retirement plan advisor (RPA) aggregators acquiring wealth firms and record keepers expanding into wealth services, indicating a convergence of services driven by the pursuit of value and personalized service.
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