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Wealthy Investors Want Fee Transparency From Advisors

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Feb 18th 2016
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The majority of wealthy investors want transparency from their financial advisors yet likely don’t understand the fees they pay, according to a new study by global analytics firm Cerulli Associates.

A survey of high-net-worth investors revealed that 62 percent cite transparency – meaning, nothing is hidden – as a key factor in choosing advisors. Yet advisors need to do a better job in ensuring that existing and potential clients understand fee arrangements.

“The financial industry was built around the premise that investors understand the fees they pay and sign documents affirming their awareness,” Scott Smith, director at Cerulli, said in a prepared statement. “Cerulli’s research indicates that investors who truly comprehend the entirety of their costs are more the exception than the rule. The overall expenses of pooled investment vehicles, including management fees and other embedded fees, such as 12b-1s, are essentially nonexistent to many investors. If they do not see a line-item deduction from their accounts, they do not recognize a transfer of wealth from themselves to their advisor or provider.”

What’s more, fiduciary obligations are under increased scrutiny by regulators and legislators, and the US Department of Labor’s final fiduciary rule is likely to be released within months. Cerulli’s study nods to these concerns, stating that “firms must make their best efforts to ensure that all of their offerings are of the highest caliber available to assure both investors and their advisors that the offers are truly in clients’ interest and not simply cases of maximizing the firm’s revenue.”

But the issue poses something of a catch-22. Investors want transparency “but often end up simply placing their trust in their advisor rather than seeking what may be a better solution elsewhere,” the study states, and advisors are happy to oblige.

“Even advisors who are confident in the value they provide generally shy away from these fee discussions lest any one of the potential fees in a relationship create an investor objection that did not previously exist,” the study states.

Therein lies the catch-22 – or what the study calls “the path of least resistance.” Investors think advisors must put clients’ interests first and advisors aren’t motivated to tell them otherwise.

Transparency, in fact, was the most important of six factors that respondents were asked to consider. Investors from age 60 to more than 70 years old ranked it more important than those younger than 50 to 60 years old.

Other important factors, in order, include:

  • Prompt follow-up to requests: 59 percent of all high-net-worth investors, but most important in the 60 to 69 age group.
  • Maintains right amount of contact: 47 percent of all high-net-worth investors, but slightly higher in the 60 to 69 age group.
  • Option to self-manage some services: 32 percent of all high-net-worth investors, but slightly less in the 70-plus age group.
  • Uses cutting-edge technology: 21 percent of all high-net-worth investors, but higher in the 50-and-under group.
  • Offers educational tools: 13 percent of all high-net-worth investors, but much higher in the 50-and-under group and much less in the 70-plus group.

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