At first glance, wealth management and real estate may appear worlds apart, but registered investment advisor (RIA) firms should take note of a recent $418 million settlement by the National Association of Realtors (NAR).
This settlement resolved antitrust litigation accusing realtors of inflating home sale commissions, a move that dismantled a long-standing commission structure. It has introduced greater transparency and empowered home buyers to negotiate agent fees or even opt out of using an agent entirely.
This trend toward transparency in real estate offers a valuable lesson for RIAs. Fee compression continues to be a pressing issue in the wealth management space, with clients scrutinizing advisory fees more closely. Fidelity’s 2023 RIA Benchmarking Survey highlights this shift, noting that many firms have turned to discounting in response to clients’ growing fee sensitivity. Specifically, 70% of firms managing less than $1 billion and 89% of those managing over $1 billion reported offering discounts.
As wealth management service models and fee structures face mounting pressure, the need for greater transparency is becoming more urgent. Just as realtors encountered legal challenges over opaque commission structures, RIAs may also face disputes over bundled fees that combine financial planning and investment management. Forward-thinking RIAs should learn from the NAR settlement and prioritize hyper-fee transparency to preempt potential legal issues. Simple, easily understood fee structures can protect against accusations of unclear billing practices and help RIAs uphold their fiduciary responsibilities.
Making fees crystal clear. For many advisors, achieving hyper-fee transparency may feel overwhelming. However, a practical approach is to unbundle services, charging separate fees for financial planning and investment management. For example, an RIA might charge a flat annual fee for ongoing financial planning, paired with an asset-based fee for managing investments. This straightforward pricing model not only makes it easier for advisors to communicate their value but also helps clients understand the breadth of services provided. To visualize this approach, think of a Venn diagram. The advisor starts in the center, outlining the client’s ideal financial journey. Then, as they move outward, they address specific services like estate planning or tax strategies, all within the larger context of the client’s goals. This method helps clients clearly see the advisor’s role throughout the entire financial planning process.
Bundling all services into one fee may create challenges, particularly with younger clients who value customization and transparency. As another Fidelity report points out, understanding and addressing the unique needs of younger generations is critical for RIAs’ long-term success. The significant wealth being accumulated by younger clients, driven in part by the great wealth transfer, presents a key opportunity for advisors to refine their services and fee structures to better engage and serve these clients profitably.
The NAR settlement should serve as a wake-up call for RIAs. It reinforces the need to provide clients with clear, concise explanations of the fees they are paying. Hyper-fee transparency not only aligns with fiduciary standards and full disclosure requirements but also builds the trust and loyalty needed to create lasting client relationships.
