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.