A Different Way to Combat Fee Compression

No matter what business type one analyzes, it is evident that the world is getting even more competitive. A key area of focus is saving clients money. From free 2-day shipping to online deal sites like Gilt City, one thing is abundantly clear: you need to offer your goods and/or services at a compelling price if you are going to succeed. The Financial Advisory industry is certainly no exception. The proof of fee compression can be seen in the rise of robo-advisors, low cost ETFs, and large custodians like Schwab and Fidelity battling on TV for who has the cheapest trade commissions. This is leaving many wealth managers feeling like the only option is to cut their fees or risk being left behind. But is that true?

One option that seems to have flown under the radar is the introduction of pricing structures like Asset Based Pricing (ABP). ABP is custodial clearing and execution pricing that is based upon an annual rate of basis points instead of a per trade amount. The latter structure is commonly referred to as Transaction Based Pricing (TBP). ABP can help an advisory practice in numerous areas, including: expanding product offerings, decision making, fee transparency, and cost control.

Asset Based Pricing opens the door to lower cost implementations of actively managed strategies — which typically have more frequent tactical adjustments. This helps to expand the potential pool of investments that advisors can use which means active strategies that were previously deemed too expensive (from a transactional perspective) are now within reason when an ABP pricing schedule is used.

In addition, utilizing Asset Based Pricing can help to eliminate some of the challenges advisors face daily. For example, there is no more worrying about cost impact of raising cash for clients or conducting minor rebalances to ensure the client remains in tolerance with their IPS. These trades are covered in the ABP fee.

Finally, ABP can help provide transparency to both an advisor and their clients by knowing what the maximum out of pocket fees will be for clearing and execution on the account. This helps provide clarity on the fee schedule and is not influenced by activity in the account or investment decisions made.

To illustrate the potential benefit of ABP, we have provided an example of a representative ABP fee schedule along with typical transaction-based pricing. To illustrate the breakeven points for these schedules, we have also included two different monthly trade amounts.

Before we get to the examples, let’s look at our two primary assumptions:

Annual Asset Based Rate: 0.12%An account with $300,000 would pay an annual basis point fee of $360 or 0.12% per year.
Price Per Transaction: $4.95Each transaction in a client account would cost $4.95.

Now, let’s review the following scenarios:

Scenario 1 – 15 Trades Per Month

Monthly Trades: 15
Annual Trades: 180
Trade Cost: $4.95
Annual TBP Trading Cost: $891


The breakeven point for a strategy that trades 15 times per month is $742,500 in total account size. This would have equal total trading costs of 0.12% for both ABP and TBP.

Scenario 2 – 30 Trades Per Month

Monthly Trades: 30
Annual Trades: 360
Trade Cost: $4.95
Annual TBP Trading Cost: $1,782


The breakeven point for a strategy that trades 30 times per month is $1,485,002 in total account size. This would have equal total trading costs of 0.12% for both ABP and TBP.

As the data above shows, it can be extremely beneficial to utilize asset-based pricing if a more active approach is taken – especially with smaller account sizes. No matter how low your custodian’s transaction-based costs have become in recent years, it still may be better to use ABP for active strategies. It can help increase transparency for clients, control transaction costs, manage accounts and, most importantly, reduce overall client fees without having to make any changes to your profitability.

About the author: Michael Pakula