All your margin are belong to us

(If you don’t get the reference.)

I suppose many will read this and say “Enough already, James” but here I go again.

A big study came out this week on current average advisory fees. There aren’t really any surprises here and it is very much in line with what else I’ve seen, including the passive/”low cost” DFA advisor community benchmarking reports.

This table is lifted directly from the report:

Investment Amounts Average Fees (%)
$50,000

1.35%

$100,000

1.24%

$150,000

1.21%

$250,000

1.19%

$500,000

1.06%

$1,000,000

1.02%

$1,500,000

0.99%

$2,000,000

0.96%

$2,500,000

0.93%

$5,000,000

0.88%

$7,500,000

0.82%

$10,000,000

0.74%

$20,000,000

0.71%

$30,000,000

0.65%

At $1,000,000 the average advisor charges just over 1%. And apparently there is zero operating scale in this business, since at $2,000,000 that advisor has discounted his fee by a whopping 0.06%. In real dollars, that’s $10,200 to manage a portfolio of $1,000,000 and $19,200 for the portfolio of $2,000,000.

With larger portfolios things just get crazy, the investor with a portfolio of $5,000,000 pays a practically absurd $44,000 per year. I won’t even bother with the math beyond that but you have a calculator too. It’s worth noting that the report also breaks out the average hourly rate charged by financial advisors: $150 – $300 an hour. So at $44,000, I hope those clients are getting their 140 hours a year.

I see two messages underlying these numbers:

  1. The advisor community has reaped the economies of scale from high net worth investors and taken it for their bottom lines. Schwab will charge you $8.95 to buy $10,000 or $250,000 of a Vanguard ETF because it’s the same transaction. The $250,000 purchase has a nice scale advantage over the smaller ticket. But such benefits don’t translate to receiving professional advice, even though the investor with $2,000,000 will have nearly identical needs as the investor with $1,000,000. She is just lucky enough to get to pay an extra $9,000 every year for that advice!
  2. There is still no price competition among advisors. It’s not quite collusion, it’s more apathy. Don’t think for a second that the majority of advisors reading this study look at it for an opportunity to stand out. Instead they want to know what they can get away with charging. If the average guy isn’t sharing back any of the economies of scale with investors, neither will he! And so we end up in a market of very, very tightly clustered pricing.

The longer I’m at this gig, the more head-scratching it all becomes to me. I have to admit to myself that there just aren’t that many investors concerned about this sort of thing. Or that if they go an interview 5 advisors they will see 5 fee schedules that are practically indistinguishable. (The advisors and services offered are probably also indistinguishable, but that’s another topic for another day).

For all the hubub about robo advisors and pressure on fees, it’s just not happening in real life. The average 50 year old advisor has zero incentive to move away from charging 1% for asset management. There’s little to no price competition in the form of alternative models, inertia is incredibly powerful as clients rarely change advisors, and if the client does head down the street he’ll get a nearly identical fee from anyone else. So the song remains the same, and likely will for the foreseeable future.

But slowly, some young advisors out there are going to see this as a real chance, and move on it. Jeff Bezos said it best:

“Your margin is my opportunity.”

Reference: Average Financial Advisor Fees in 2016. How Much Does a Financial Advisor Cost?

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