All Market Segments Experience Strong Growth in Rising Market
MMI Central 3Q 2016 released today by the Money Management Institute (MMI), the national association representing the investment advisory solutions (IAS) and wealth management industry, reports a 3% increase in IAS assets to slightly over $4.3 trillion during the second quarter of 2016 compared to a 2.5% rise in the S&P 500.
The advisory solutions industry steadily gained ground during the quarter, benefiting from the spring and summertime boom in equities and markedly less volatile fixed-income markets. Overall, IAS assets rose by $128 billion – nearly double the rise in the first quarter – as all market segments posted solid increases.
Once again, Unified Managed Accounts (UMAs) and Rep as Portfolio Manager (RPM) programs, which have been the strongest performing market segments in recent years, led all market segments with increases of 5.5% and 4%, respectively. While the growth in other segments was more modest, it was well ahead of first quarter performance with Separately Managed Accounts (SMA), Rep as Advisor (RAA), and Mutual Fund Advisory (MFA) program assets growing by 2.4%, 2.3%, and 1.9%, respectively.
Total IAS net inflows for the second quarter were $58 billion, more than double the first quarter inflows. RPM led other programs with flows of $27.8 billion – more than equaling the first quarter flows of $27.4 billion for the entire industry. Next came UMAs with $13.8 billion in net flows, SMAs with a very healthy intake of $11.2 billion for the quarter, MFA with $2.4 billion in flows, and RAA programs with $1.3 billion in net new assets.
Price Compression—Myth or Reality?
The prospect of fee compression has generated considerable discussion across the financial services industry. A special section in this edition of MMI Central – previewing research from the upcoming 2016-2017 MMI Industry Guide to Investment Advisory Solutions produced by MMI and Dover Financial Research (Dover) – provides an overview of this topic.
Within the advisory segment, the forces at work driving price compression are intensified competition among investment managers, more regulatory scrutiny and a trend toward greater pricing transparency, increased competition associated with robo advisors and other low-cost distribution options, and broad access to lower-cost passive products such as ETFs.
Simultaneously, there is a continued migration away from the more traditional advisory programs, such as SMA, toward UMA/UMH and RPM platforms. In addition, the Department of Labor Fiduciary Rule is expected to have significant implications for fee levels. The convergence of these factors prompted Dover to survey MMI sponsor firm members on the state of UMA/UMH fees for the 2016–2017 Industry Guide. Sponsor firms provided input on year-end 2015 UMA fees, and their aggregated responses reveal some clear trends.
There is ample evidence of ongoing fee compression. Among the key findings:
- SMA model-delivered investment management fees continue to decline modestly.
- There is a 10-basis-point spread between the highest and lowest fees for model-delivered SMA equity strategies with most firms tilting toward the higher end of the range.
- There is a 10 basis point spread between the highest and lowest fees for model-delivered fixed income strategies.
- The average reported all-in client fees for model-delivered equity and fixed income strategies are 131 and 141 bps, respectively.
- The all-in client fee includes charges for investment management, overlay management, and advisory services.
- Fee compression was a factor for 90% of the sponsor firms responding to the survey. Of those firms, 39% indicated that the actual all-in client fees had declined by 6% to 10%.
Among the observations made by survey participants were that the industry will continue to experience gradual fee compression over the next several years as low-cost distribution through robo advisors puts pressure on the more traditional distribution channels. In addition, the trend toward low-cost products such as ETFs will continue since advisors are adopting them at a much faster rate. Also, one of the outcomes of the Department of Labor Fiduciary Rule will be greater pricing transparency, which will put pressure on all aspects of pricing.
For their part, sponsor firms are working to develop new practices and technologies to help lower the cost of distribution through financial advisors. As the cost of distribution decreases, so too may overall pricing.