Investors are paying more attention to the fees they’re paying for financial advice and new research shows a growing number prefer newer models such as asset-based or retainer fees over old-school commissions.
In turn, more advisors are also aligning their services to accommodate the changing consumer preferences – and seeing their client base soar as a result.
During the past decade, fee awareness among investors in the U.S., particularly, has increased dramatically, according to new research from Boston-based research and consulting firm Cerulli Associates Inc. It shows 55 per cent of investors surveyed last year were aware of the fees they were being charged, up from 35 per cent in 2011.
The survey also found 61 per cent of investors prefer to pay for their advice through a fee model, such as asset-based fees or fee-for-service financial planning, compared with 39 per cent who prefer commissions. Of the 61 per cent, 39 per cent prefer an asset-based fee, 17 per cent a retainer and 5 per cent an hourly fee.
“As a new generation of investors begins to seek financial advice, Cerulli anticipates that investors will look for more non-traditional fee arrangements in line with how they currently pay for other services,” the report states.
Stephen Caruso, an analyst in the wealth management team at Cerulli, says the fee models are a better fit for the way advice is being delivered now as “more advisors are selling holistic solutions” whereas commission models were more appropriate when advisors were primarily stockbrokers who sold products to investors.
He adds that certain parts of investment management, such as asset allocation or security selection, are being increasingly commoditized, forcing advisors to shift their business models and, in turn, their fee structure to stay competitive.
Cerulli’s survey shows the most popular “non-traditional fees” advisors charge are for financial plans, charged by almost one-third of advisors (31 per cent). Annual or retainer fees and hourly fees were less prevalent, charged by 13 per cent and 10 per cent of advisors, respectively.
Adopting new fee structures is particularly important for advisors looking to capture the next generation of investors.
The world has changed and people are required to do more heavy lifting in their financial decisions than they ever had before.— Julia Chung, Spring Planning
“Non-traditional fees give advisors the latitude to offer their services to a wider range of prospects, including their existing clients’ children and inheritors,” Mr. Caruso says.
Financial planning fees are one non-traditional fee model that Cerulli expects to become even more popular, he says, as more advisors look to differentiate their service offerings and provide additional value to their clients.
“By offering financial planning, many advisors are getting deep in the weeds with clients, discussing hopes, dreams, and fears as they progress through their lives into retirement,” he says. “These in-depth engagements come with costs; not only are advisors giving their time and expertise, but they’re also often leveraging software to build these plans, and in some cases, external specialists.”
Paying for ‘big picture’ advice
Julia Chung, partner and senior financial planner with Spring Planning Inc. in Vancouver, which provides “conflict-free,” advice-only personal financial services for a set fee, says demand for her services has been “going through the roof” since she co-founded the company in 2017.
Investors are paying closer attention to fees, she says, especially since the start of the pandemic as more people focus on their finances as it relates to their lifestyle.
Ms. Chung believes many investors are interested in paying for big-picture advice that guides them on how much they should save, invest and spend in the short and long term.
“We think that good financial planning really comes from not being an expert in any area, but helping people create the life they want,” she says.
The need for broader financial advice has also increased as investing becomes more complex.
Decades ago, many workers had pensions and relied largely on that income to retire, Ms. Chung says. Today, pensions are less common and there are more investment choices, from equities to real estate and income from running a business.
“The world has changed and people are required to do more heavy lifting in their financial decisions than they ever had before,” she says. “Investors have more of a personal responsibility to take care of themselves ... I find people really want to have somebody to talk this through.”
Alternative no-contract models
Some investors are turning to subscription-based models that advisors like David O’Leary, founder and investment consultant at Toronto-based Kind Wealth, a fee-for-service financial planning firm, offer.
Clients pay a one-time upfront fee that includes gathering all their financial and other information and then a monthly subscription fee. There are no contracts, Mr. O’Leary says.
“It gives them flexibility because they’re not locked in and it provides transparency because they know exactly what the payment is that comes off their credit card or from their bank account,” he says.
Mr. O’Leary also says the advice is conflict-free because it’s not tied to the sale of financial products.
“Most of [our clients] come to us because they like the fact that we are an advice-only financial planner, and they could trust that the advice is not conflicted because we’re not receiving commissions or kickbacks,” he says.
“People pay for us for advice, so if we tell them that they should invest more money or get insurance or spend …. we don’t make more or less money, no matter what we recommend.”
Mr. O’Leary says he’s considering offering investment management services in the future and would charge a fee based on the asset base. But, it would be separate from the financial planning fees to keep it transparent.
“That way, you know what you’re paying for each service and you can decide if you want both of those things from the same advisor,” he says.
Each type of fee structure has its own benefits that fit different client or advisor situations, says Mr. Caruso of Cerulli. However, he says firms and advisors should consider adopting non-traditional fees as a way to “reach potential clients or optimize existing relationships.”
If an advisor chooses to remain commission-based, he says, they should consider factors like the portability of their book of business, how they can create predictable revenue streams and if they have a strategy to attract next-generation investors.
“All of these factors may impact the value of their business if they choose to sell it upon retirement.”