Morningstar CEO: ‘The Wolf’ Is Coming For AUM Fees

It’s no surprise that wealth managers are some of the better-paid financial professionals in the industry, with arguably some of the lowest office hours-to-golf hole ratios in the country. But market returns are expected to drop over the next decade, putting pressure on the value advisors provide their clients — and the fees that they charge them. 

US stocks have generated a healthy 12% annualized return over the past decade, but the good times aren’t expected to last: Morningstar researchers are calling for that to be cut in half over the next 10 years. And while clients could care less about measly fees when markets are in the stratosphere, if returns plummet to just 5%, then a standard AUM fee quickly becomes 20% of total returns. 

“You can be sure it’s going to draw a lot more scrutiny,” CEO Kunal Kapoor said during a keynote speech at the June Morningstar Investment Conference in Chicago. While there are always doomsayers, the day will eventually come when markets begin to sputter. “Are we crying ‘wolf’ again?” Kapoor said. “Let me assure you of this: The wolf shows up eventually.”

Race to Zero

The 1% fee on assets has been a standard in the financial industry for decades. But we need to look no further than the asset management industry for a warning. Expense ratios on funds toppled over the past decade, and have led to fees as low as five basis points for passive products. Average fees in the US crashed some 40% in the 2010s as competition for assets heated up and new issuers entered the fray, according to data from JPMorgan.

So, what’s the upside? Kapoor has two pieces of advice. Make sure clients understand the value of great advice: put it front and center, embrace it, and talk about it. For the second, embrace technology to bring down overhead and create better experiences for clients. 

More Fees, Please. While 1% AUM fees may be unsustainable in market downturns, there are plenty of other fee options that are gaining steam. Fee-based plans and subscription models can help advisors with steady income streams and are actually preferred by some clients. A study by the fintech AdvicePay of almost 400,000 transactions that were made last year found:

• Monthly recurring subscriptions for planning fees jumped to an average of $265 per client, which is a 6% rise over the previous year. 
• Quarterly subscriptions also saw an increase of 1.6%, averaging $968 per client.
• One-time payments also grew 6.7% to $1,578.