Q. Is the AUM (asset under management) fee justified?
A. It's really hard to say, let's take a look at the following different scenarios:
1. Financial firms offer financial planning services only, do not manage portfolios
Such advisors just charge hourly fees, monthly or annual retainer fees, or standalone project fees for modular financial plan solutions, there is portfolio involved, therefore there is no AUM fee being charged.
2. Financial firms charge an AUM fee to simply purchase a passive portfolio
These advisors charge AUM to just buy clients beta, but the price point of beta is moving towards zero due to competition, as a result, almost all the advisors provide some non-portfolio (and non-AUM-based) financial planning services to justify their AUM fees.
3. Financial firms provide alpha-related offerings
These advisors provide security or asset class level alpha-related offerings, the AUM fee could be justified if they could truly deliver, but alpha is difficult to find, so the pressure is to deliver alpha to justify their value propositions.
Many advisors, including robo-advisors, provide portfolio-related gamma, such as automated rebalancing, ongoing tax-loss harvesting, asset location, etc., will likely to continue to charge AUM fee, but pricing pressure is high so in the end they will need to develop some competitive advantages, such as technology or scale, in order to survive.
4. Financial firms offer both financial planning gamma and portfolio-related alpha
This is the most popular type in the current marketplace, as fee-for-financial-planning firms have struggled to scale, and investment-only firms have struggled with being commoditized and the rising pressure to justify their often-not-delivered alpha; by combining both under a single pricing structure and business model, firms effectively “diversify” their value proposition, such that hopefully at least one part or another will be “working” in any particular year.
From the above perspective, it’s really hard to say whether AUM fees are justified or not, and whether AUM fees will disappear or not.
In fact, with the “insourcing” trend of financial planning at large asset management firms and platforms, for example, the expansion of Vanguard Personal Advisor Services and the growth of Schwab Private Client. AUM fees become increasingly modest or entirely free because these firms recognize that if financial planning services improve client retention, the increase in lifetime client value justifies the entire cost of the service without charging the client at all.
A. It's really hard to say, let's take a look at the following different scenarios:
1. Financial firms offer financial planning services only, do not manage portfolios
Such advisors just charge hourly fees, monthly or annual retainer fees, or standalone project fees for modular financial plan solutions, there is portfolio involved, therefore there is no AUM fee being charged.
2. Financial firms charge an AUM fee to simply purchase a passive portfolio
These advisors charge AUM to just buy clients beta, but the price point of beta is moving towards zero due to competition, as a result, almost all the advisors provide some non-portfolio (and non-AUM-based) financial planning services to justify their AUM fees.
3. Financial firms provide alpha-related offerings
These advisors provide security or asset class level alpha-related offerings, the AUM fee could be justified if they could truly deliver, but alpha is difficult to find, so the pressure is to deliver alpha to justify their value propositions.
Many advisors, including robo-advisors, provide portfolio-related gamma, such as automated rebalancing, ongoing tax-loss harvesting, asset location, etc., will likely to continue to charge AUM fee, but pricing pressure is high so in the end they will need to develop some competitive advantages, such as technology or scale, in order to survive.
4. Financial firms offer both financial planning gamma and portfolio-related alpha
This is the most popular type in the current marketplace, as fee-for-financial-planning firms have struggled to scale, and investment-only firms have struggled with being commoditized and the rising pressure to justify their often-not-delivered alpha; by combining both under a single pricing structure and business model, firms effectively “diversify” their value proposition, such that hopefully at least one part or another will be “working” in any particular year.
From the above perspective, it’s really hard to say whether AUM fees are justified or not, and whether AUM fees will disappear or not.
In fact, with the “insourcing” trend of financial planning at large asset management firms and platforms, for example, the expansion of Vanguard Personal Advisor Services and the growth of Schwab Private Client. AUM fees become increasingly modest or entirely free because these firms recognize that if financial planning services improve client retention, the increase in lifetime client value justifies the entire cost of the service without charging the client at all.
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