We caught up with Robert K. Huebscher, Founder and CEO of Advisor Perspectives, at the iFAST Wrap Summit held in Mumbai recently. In the first part of this interview, Robert talks about the key trends that have shaped advisory practice in United States, why retainer fee is an ideal model for fee-only advisers and more.
Margins in advisory practices are shrinking. How are advisers coping with it?
The assets under management in United States is increasing. Many advisers in U.S charge AUM based fee.
There is fee compression in asset management industry due to increased competition. Margin pressure may be coming in advisory practices not because fees are coming down. It is because advisers are providing more number of services. Services are getting broader and complex. They are becoming more planning focused than investment focused. The planning is encompassing much more – accumulation planning, retirement, estate management, tax planning and helping clients understand decisions about other types of speculative investments. This has been a good decade for financial planners who charge AUM based fee because both stocks and bonds have performed very well. If your fee is based on assets and assets are growing, you don’t even have to get more clients to increase revenues.
Many retail investors in India are not used to paying fee separately. How can advisers charge fee?
Now investors in United States know how much fee they are paying. This is a positive step forward as transparency increases. In bundled products, investors didn’t know what fee they are paying. One of the fundamental precepts of being fiduciary is transparency. In fiduciary practices, clients know what they are paying for the services they are getting.
Indian wealth management industry is where the U.S. industry was 20 years ago from a regulatory transition standpoint from brokerage to fee-based fiduciary model. I think the transition will happen much faster in India because the benefits of transparency and fiduciary model has been widely demonstrated and compelling and consumers will resonate with it.
Are brick-and-mortar advisers facing competition from robos in United States?
Advisers in United States are not facing any competition from robo advisers. Robos have focused solely on market segments of consumers who are too big or don’t want to be purely self-directed investors or are too small and don’t want to pay for a human adviser. It is a middle ground between self-directed and human advisers. They are serving retail clients that may not be very lucrative for human advisers. Robo advisers have succeeded on Charles Schwab platform as robo advisers integrated with their custodian platform allow advisers to offload smaller clients onto it. But it is a small part of the business. Robos haven’t had any impact on advisers or on their firm value. When an adviser sells his/her firm, that value hasn’t diminished because we now live in a world of robo advisers.
How can advisers communicate the value they provide to clients?
The challenge for advisers is to show that the services are not intangible. Advisers are behavioural coach for their clients. They have to guide them when the market tanks, help them avoid investing mistakes, prioritise their goals and help them reach their goals. They have to give advice on spending habits, philanthropy, budgeting, etc. There are clearly tangible benefits that clients get from advisers. But they are not easily quantifiable. Most consumers need help in understanding that they need adviser’s guidance. If you ask most adult Americans if they have enough money to retire, the answer would be no. They are also clueless about how to accumulate retirement corpus. Those are basic questions advisers can help answer.
What are the common reasons why clients fire an adviser?
Some clients leave their adviser because the adviser has not developed a bond with them. Some clients leave because the adviser hasn’t communicated often enough or in a relevant manner. I don’t think clients leave due to investment underperformance.
What key trends have shaped the advisory practice in U.S.?
The past decade has been very solid for fiduciary advisers. There have been some challenges on the regulatory front but by and large it has been good. They have been able to demonstrate and reinforce their value proposition.
There will be a slight transition in fee structure that fiduciary advisers are charging. For fiduciary advisers, the dominant fee model is AUM based fee. 30% or more advisers in U.S charge AUM based fee. The alternative is retainer or hourly-based fee which may be 10% of advisers that use one of those. The remaining are using some combination.
The challenge with the AUM model is that it is not aligned with the value advisers are providing. When the value is more on the planning side than on the investment management side, there is a disconnect in the value and the manner in which they are charging fee. It takes the same amount of time, money and effort to do a plan for a client with $3 million assets as it does for $5 million portfolio. But it is hard to justify why you are charging more for $5 million client portfolio.
If I look at over the next decade, we are going to see a transition. If advisers don’t cope with that then they will be vulnerable to competition. Younger generation of advisers will provide planning services for less than what the AUM model would cost a client. They can use the technology and tools. In U.S., the adviser population is ageing. There are more advisers in U.S. aged above 70 than under the age of 30. There’s going to be a transition to younger advisers. I suspect that will be one of the drivers to transition from AUM based fee to retainer and hourly based fee. If there is a downturn in markets, advisers with AUM based fee will see their revenues drop proportionate to the mark-to-market decline. A bear market could accelerate the transition towards retainer fee.
Is the fee regulated in U.S.?
There is no regulation on fee. It has to be transparent and disclosed to clients. Average fee which fiduciary advisers charge clients is slightly under 1% of AUM. The fee varies among advisers.