Regulatory reforms and the industry’s evolution is driving a continued decline in fees for U.S. asset management firm, says a new report from Boston-based research and consulting firm Cerulli Associates.
A series of inter-related factors is helping to power a race to the bottom in asset management fees.
Regulatory reforms have extended fiduciary obligations, heightening the demand for lower-cost products. In turn, wealth management firms are shifting more clients to fee-based arrangements, and asset managers are increasing the development of low-cost products, while also moving to provide more asset allocation advice.
“There are multiple causes of fee compression in asset management, which compound upon each other to prompt industry change. For example, greater regulation has formalized the buying process and created demand for low-cost passive products,” says Bing Waldert, director at Cerulli, in a statement.
“Under the influence of professional buyers, eliminating the highest-priced products is often the first screen, creating a race to the bottom as managers try to avoid having above-average fees.”
At the same time, the provision of asset allocation advice is becoming increasingly important, which is also driving a decline in asset management fees.
“In some cases, asset managers are dropping fees on asset management products to near zero, instead choosing to charge for asset allocation, a task traditionally performed by the wealth manager,” Waldert says.
“The growth of asset allocation advice demonstrates how asset and wealth managers are using these industry trends to enter each other’s value chains and attempt to capture a greater share of a shrinking fee pool,” he adds.
Cerulli expects increasing automation to continue to compress overall fees in wealth management.
“Automation will lower the cost of transactions, bringing down fees in wealth management,” says Waldert. “In addition, digital advice platforms emphasize asset allocation, which pressures fees in individual asset manager products and benefits exchange-traded funds (ETFs).”