As investors become more fee-aware and financial advice
continues to favor fee-based relationships, a new study finds that advisors are
increasingly considering nontraditional fees to align their service offerings
with client demand.
Consequently, the wealth management industry’s shift to
fee-based advice has brought new opportunities for alternative pricing models
that enable advisors to work with clients across the wealth spectrum while
valuing their advice appropriately, according to the latest Cerulli Edge—U.S.
Advisor Edition.
While only 35% of investors in 2011 were aware of the fees
they were being charged, by the second quarter of 2020, more than half (55%) of
surveyed investors understood how they paid for financial advice. And while
investor fee awareness is reaching new highs, investors’ willingness to pay for
advice has also grown significantly. The report notes that investors are
increasingly aware that their financial situations require specialized advice
and recognize the value of financial advisors’ services.
According to Cerulli’s research, most households prefer to
pay for their advice via a fee (61%) (e.g., asset-based fees, financial
planning fees) compared with 39% who prefer commissions. Nearly a fifth (17%)
prefer to pay for their advice via a retainer fee, while 5% prefer an hourly
fee.
Next-Gen Investors and Financial Planning
But as a new generation of investors begins to seek
financial advice, Cerulli anticipates that investors will look for more
nontraditional fee arrangements in line with how they currently pay for other
services.
Firms that hope to court this up-and-coming group should
offer their advisors the infrastructure and support to charge non-traditional
fees, the report suggests. “By reducing barriers to non-traditional fee
options, firms can help drive adoption and ensure their advisors stay
competitive,” the report emphasizes.
Currently, the most popular nontraditional fees are fees for
financial plans, charged by nearly a third of advisors (31%), the report notes.
And financial planning has become “nearly ubiquitous,” offered by firms of all
sizes, according to Cerulli. In 2020, an average of 74% of advisors’ clients
received comprehensive ongoing planning advice or targeted planning on a
specific client need. Cerulli projects that by 2022, 80% of advisors’ clients
will receive some form of planning advice.
“The proliferation of financial planning has led to the
growth of planning-focused practices in which advisors prefer to align the
value of their advice toward the financial plan and process rather than just
investment management,” the report observes, adding that this alignment can
make the conversion from a prospect to a client that much easier.
Cerulli further notes, however, that even with the digital
tools available today, financial planning is time-consuming. In practices in
which planning is a core offering, these fees can help reduce the burden of
hiring additional staff to support the advisor’s planning business. But because
pricing a financial planning offering can be a “murky process,” the firm
recommends that practices design this high-touch service offering with
scalability in mind.
Retainer and Annual Fees
Meanwhile, retainer and annual subscription fees have been
pushed into the spotlight as financial advisors move toward pricing based on
the complexity of the client’s financial situation instead of a client’s
invested assets, the report notes. Still, annual or retainer fees and hourly
fees are less prevalent, with 13% and 10% of advisors, respectively,
implementing each in their practices.
By charging subscription fees, advisors can offer their
services to a market segment in which charging an AUM-based fee would not be
the best option for clients, the report observes. To that point, while
so-called “HENRYs”—high-earning, not-rich-yet investors—have limited investable
assets, working with an advisor to build wealth can contribute significantly to
an advisor’s practice over the long term.
“The long-term potential for both fees present valuable
opportunities for advisors who want to expand their advice offering to better
align with their business development plans and needs of clients,” says Cerulli
analyst Stephen Caruso.
Ultimately, the asset-based fee model is not going away any
time soon, Cerulli observes, but firms willing to create opportunities should
look at non-traditional fees as another avenue for their advisors to reach
potential clients or optimize existing relationships. “Alternative fee
structures provide the opportunity to engage more effectively with younger
investors—particularly children and inheritors of existing clients,” Caruso
emphasizes.
Managed Account Offerings
Meanwhile, despite the threat of fee compression, advisors
have opportunities to maintain higher price points for their business by using
managed account offerings in the right circumstances, which can help protect an
advisor’s bottom line, Cerulli suggests.
While separately managed account (SMA) and unified managed
account (UMA) advisory fees experienced the steepest declines since 2016, the
vehicle type may be well positioned to combat further fee compression as
clients continue to press advisors for more personalized products, the report
notes.
As one managed account executive explained to Cerulli, “The
growth of fee-based and the growth of financial planning leads to growth in
vocalization of clients for customization. Customization is where the advisor is
ramping up the value proposition. In an SMA you can tax-loss harvest, impose
security restrictions, and that is very much in line with client demand.”
For advisors seeking to reduce the effects on their bottom
lines from fee-aware investors, Cerulli believes they must focus on maintaining
and effectively communicating their value proposition to clients. “As advisors
try to communicate their value to clients, they should emphasize portraying
themselves as holistic financial planners as opposed to just stock pickers,”
the report emphasizes. Doing so, it notes, may help advisors mitigate clients
moving into lower cost options such as robo-advisors or do-it-yourself
platforms.
Click here for the
original article.