As financial advisors navigate an increasingly digital, low-cost and fee-transparent landscape, increasingly they are being tasked with redefining the client experience to capture and retain assets, according to new research.
To remain competitive, not only must advisors’ definition of advice evolve to include nonfinancial aspects of clients’ lives, but also they must curate a meaningful experiential process for those clients, Cerulli Associates emphasizes in the April 2019 issue of The Cerulli Edge—U.S. Asset and Wealth Management Edition.
Cerulli notes that although fee compression has clearly affected asset managers, so far it has found little evidence of compression of financial advisors’ fees. Instead, investors are becoming more aware of their advisors’ compensation structures, and advisors are recognizing that they are not immune from increased cost transparency. This is raising fee sensitivity among their clients, Cerulli says.
In fact, the percentage of investors who either believe that the advice they receive is either free or are unsure how they pay for advice fell from 65% in 2011 to 42% in 2018. And nearly three quarters of advisors either agree or strongly agree that prospective clients are now more sensitive about fee levels than they were five years ago.
Similarly, 42% of the FAs polled by Cerulli anticipate declining fees and attribute this to the growth of digital advice competitors. “Reacting to this perceived threat, practices are increasingly migrating away from measuring their value based on their asset management services, which can more easily be commoditized. Instead, they are beginning to think holistically about the nonfinancial, intangible impact they can have on their clients’ lives,” the firm advises.
Willingness to Pay
Despite growing fee sensitivity, a willingness to pay for advice has increased, Cerulli observes. As of the second quarter of 2018, 53% of investors agreed that they are willing to pay for advice regarding their financial investments. This represents an increase of 15 percentage points from 2009, when only 38% of investors expressed such willingness, the report notes.
Overall, 76% of investors agree or strongly agree that the advice they receive from their FA is worth the expense, but advisors must articulate how that advice justifies its price tag. “While clients understand that advice comes at a cost and many believe it is worth its expense, if the cost-benefit of engaging with an advisor is not clear, they are more likely to opt for other providers,” says Marina Shtyrkov, a research analyst at Cerulli.
Practice Management
Transparency (73%), an understanding of their needs and goals (67%) and promptness of requested follow-ups (66%) reportedly are paramount to advisory relationship satisfaction. “Notably, according to satisfied investors, an advisor’s integrity and the overall relationship outweigh expertise or investment performance,” Shtyrkov explains. “Although acumen and investment performance are valuable, practices that emphasize only these elements may be misaligned with the true drivers of investor satisfaction.”
Financial advisors would be remiss, however, in overlooking expertise or sound investment philosophy while trying to strengthen existing client relationships, Cerulli observes. They should be able to justify their decisions with a sound investment philosophy, especially in times of market volatility, as investors focus their attention more heavily on investment performance, Cerulli emphasizes.
Given those findings, however, only 30% of all advisors surveyed strongly agree that their practice goes “above and beyond to make clients feel special” and offers a repeatable, consistent client experience.
“Experience-centric practices exhibit stronger results than their peers across a series of metrics, including a higher median client size, lower asset attrition, a broader service set and greater likelihood to target affluent clients,” Shtyrkov notes. “By outpacing their peers in these categories, experience-centric practices demonstrate that advisors can harness the power of their client experience to increase retention, reduce attrition, and generate a strong referral system.”
