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The president of Orion Advisor Services mined the fee information of the 1,000 RIAs who use his software
December 23, 2016 — 7:25 PM UTC by Brooke Southall
Brooke's Note: My advice when you go Christmas shopping is to become blind to the price tags. The process is too vexatious as it is without bringing in that irksome variable. But the days when I might advise an RIA to go willfully blind into a pricing decision of how and what to charge are nearing their end. The good news is that new information and thinking are brewing. Fidelity shook the keg on this pricing issue last week, with DOL pricing accountability and robo price-chopping front of mind. Now Orion is making a noteworthy move in this regard by mining pricing data. What it's coming down to is that RIAs can't have it both ways. They love asset-based fees for convenience and advice pay raises tied to the stock market. But RIAs hate that their 100-basis-point fees on managed assets are getting, consciously or unconsciously, compared to Schwab's 28 basis points on managed assets. The consumer can hardly be faulted for tying value proposition to the place where the fees and service connect on the grid -- at the assets! Orion's initial contribution will be to determine what RIAs are charging in the first place and make it easy to compare. Next RIAs will need to explain what they do without using Orwell's dictionary of five-syllable words and other fine jargon.
To the two questions about fees RIAs are perplexed about -- How much to charge and how to explain to clients what they are getting -- Eric Clarke would like to add a third question:
What the heck is everyone else charging?
The president of Orion Advisor Services LLC is launching a database that will allow, for free, the 1,000 customers of his performance reporting software to know what the other 999 are charging quantitatively and qualitatively.
"When a clients says: I think I'm being charged an unreasonable amount, he or she can show them a benchmark charged by peers," he says from Omaha, Neb. "It puts a sense of reality back into the conversation."
To keep it real, Orion combed through the 1,000 ADVs of its 1,000 clients where those fees are publicly disclosed -- typically in the ADV II, which is also known as the brochure.
Davis Janowski, senior researcher for Forrester Research in New York, like the concept. "It's a good start," he says.
The data-mining effort yields not only the fees but attaches them to the level of services advertised to give those fees a context. That context includes the type of firm -- asset manager, financial planner, TAMP etc. It also spells out the size of the accounts managed and the types of accounts managed -- namely retirement or not.
Still, that parsing will remain challenging and require big efforts to create useful comparison, says Janowski, who formerly worked for FeeX, adds. FeeX is an online start-up geared to helping investors understand fees. It has also rolled out an offering for advisors to give them a broader perspective on what advisors and stockbrokers charge.
"I don't know how easy it's going to be for Orion to keep it apples to apples," he says. "it'll take a while to sort out."
The Orion pricing effort was prompted largely by the demands implied by the new Department of Labor Rule.
One thing the Orion database will lack for in its initial release is the all-in cost of the portfolio for investors once the underlying asset management fees are added in. These fees from mutual funds, SMAs and other products can easily double the investor's total spend on fees.
Clarke says he hopes to have a database of all-in fees. Because his clients' accounts are administered on Orion software, the holding are at his fingertips.
Orion will now undertake to cross-reference those products with public databases of the fees that are charged by them. That effort is expected to wrap up in May.
Portfolio management myth
Though Clarke expects that the data will prove a boon to advisors looking to put a little data science behind the way they make such an all-important business decision as pricing, he allows that it doesn't solve for a broader pricing issue -- namely the way pricing is structured.
The problem with the pricing of most RIAs is that fees are applied to managed assets, which implies that the fees being charged are primarily related to that portfolio management. "The perception is that they're being charged for investment management. That's not really the case," he says.
Indeed, many advisors oversee far more wealth than what exists in the managed portfolio and advise on financial planning, estate planning and other matters unrelated to the purchase and sale of securities.
The problem, of course, is that nobody has really invented a more practically effective way to charge that helps the advisor grow with their clients and makes it easy for advisors to get paid. Most RIAs simply vacuum the fee out of the managed assets quarterly without so much as a bill sent.
If DOL doesn't, market will
But DOL and robo-necessity is the mother of invention.
If DOL doesn't demand pricing that is more connected to value then the market will. A typical RIA takes 1% and many of the national advisor efforts, namely Vanguard and Schwab, are coming in with fees 70% lower. RIAs are going to have to explain the massive 200%+ premium that they to charge.
Fidelity Investments issued a warning to that effect last week when it showed a drop to a multi-year net new asset growth to 6.7% at its 3,000 RIAs and named pricing as the prime culprit. Fidelity warns on the fees RIAs charge as growth of their practices falter yet lower prices aren't the answer
In other words, RIAs are failing to explain the inexplicable -- how that fat 1% asset-based fee is paying the freight for grander oversight and advice related to all that the client considers his or her "wealth."
Getting ahead of the fee issue before it becomes dire behooves advisors, according to Janowski.
"Somebody's going to come up with a Tinder for matching you up with an advisor and price is going to be a big part of that."
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