Poor market conditions and the resulting competitive environment forced RIAs to lower fees in 2002, according to a survey conducted by AdvisorBenchmarking.com.
Released this week, the survey showed that fees associated with assets under management fell 9.1 percent to 110 basis points in 2002.
Competition from traditional brokerage houses and CPAs played a significant role in the decline. According to the survey, which polled 655 RIA firms between September and December of last year, 20 percent of RIAs lost one or more clients to a CPA during 2002, 19 percent lost one or more clients to a full-service broker and 20 percent lost clients to a discount broker.
Reducing fees, especially for high-net-worth clients became a necessity. "You cut your fees or you lost your business, period," says Gerry Burchard, president of Round Hill Securities.
Burchard believes the decline in fees has less to do with competition and more to do with performance. "Most people don’t want to pay a fee until the market is going up," says Burchard.
But there’s some relief in sight. Ramy Shaalan, vice president of AdvisorBenchmarking.com, believes the pressure to reduce fees may have peaked. "Competition hasn’t necessarily grown since 2001," he says.
Still, RIAs are trying to counteract the effects of lower fees by canvassing more aggressively for new clients. According to the survey, 19 percent of new clients were a direct result of referrals from existing clients, a modest improvement from 13 percent in 2001.
Employees at the biggest firms are somewhat hindered in their prospecting by the conflict-of-interest scandals that have, fairly or not, tarnished them by association. But for RIAs "it’s become a different ball game altogether," says Shaalan. Their lack of big-name affiliation has turned into a positive.
Overall, says Shaalan, the average RIA gained more clients in 2002. According to a preliminary figure, due to be released in April as part of a larger study, the average RIA saw his client base grow by 8.11 percent in 2002.
Still, the number of clients fleeing the major brokerage houses grew only slightly in 2002. According to the survey, 25 percent of RIA new-client assets came from full service brokerages, as opposed to 24.7 percent in 2001.