After years of forecasting that robo-advisors would cause fee compression – at best reducing the profitability of advisory firms, and at worst compelling them to fold or at least merge in search of economies of scale to compete – the latest InvestmentNews Pricing and Profitability Study shows that, after holding steady since 2012, pricing power of advisory firms took a precipitous downturn in the past two years, with the average revenue yield of an advisory firm falling from 77 basis points to just 69bps since 2015.
The caveat, however, is that even as advisory firm fees may be slipping, the operating profit margins of advisory firms held steady… and did so regardless of the size of the advisory firm. In other words, while fees may be starting to decline, there is no evidence that it’s adversely impacting the profitability of advisory firms… nor that there’s any need to merge, grow, or gain economies of scale to survive and thrive in a lower fee environment.
The reason for this miraculous combination of lower advisory fees and steady advisory firm profitability: productivity. In just the past few years, the average number of clients per staff member, and revenue per staff member, is up a whopping 18%, more-than-fully offsetting any decrease in an advisory firm’s average revenue yield! In other words, “robo” technology isn’t causing fee compression and putting advisory firms out of business; instead, it’s reducing the cost of doing business in the first place, leaving firms room to cut fees, in a phenomenon that looks more like “fee deflation” than “fee compression”!
The caveat, however, is that while advisory fees were able to decline in recent years on the back of improvements in staff productivity, the productivity of financial advisors themselves decreased by 22% in recent years, as advisors are compelled to deepen client relationships and do more work with fewer clients to justify their advisory fees in the first place.
The significance of this trend is that a decline in advisory fees (potentially increasing the appeal of consumers to hire a financial advisor), coupled with a decline in advisor productivity (as advisors do more for each client), may soon make the industry’s looming talent shortage (given the 50-something average age of a financial advisor) far more acute. As even today’s financial advisor population can barely serve 15% of all US households, and the CFP certificant population is only numerous enough to serve 4% of households.
Which means, ironically, the greatest threat to the profitability and growth of advisory firms today is not that robo-advisors are or will compress fees, but simply that there aren’t enough financial advisors in the aggregate to capitalize on the opportunities being wrought by the positive fee-deflationary impact of robo technology efficiencies!