Why the Advisory Fee Structure is at a Crossroadsby
Accountants, financial planners, advisors, and anyone and everyone else in the financial services industry know that the business model is changing and, along with it, so is the fee structure. Clients are driving some of those changes, and younger ones increasingly embrace online money-management and investing tools. Yet, others are clueless even about how their financial advisors are paid.
Confusing? You bet, and it’s not even close to being resolved. A new report by SEI Advisor Network, Fees at a Crossroads, makes a valiant attempt at describing the quandary.
For starters, there’s the proliferation of advisors of all sorts – along with an alphabet soup of designations. There are financial advisors, investment advisors, independent advisors, financial planners, Certified Financial Planners, Certified Public Accountants, wealth managers, wealth advisors, and asset managers. Many carry multiple designations: CFP, CFS, CFA, CPA, PFSSM, CLU, ChFC, CEBC, RHU, CPCU, CIC, CIMA, and so on.
“As financial and investment markets have evolved over the past 25 years, the advice business needs to move ahead as well,” the report states. “We believe the very nature of the advice model is changing. Are we overstating the problem? We don’t think so.”
What complicates the business identity, the authors note, is that financial services is “the only profession that differentiates our services by how we charge for them.” And that can range from commissions to fee-only, retainers, flat fees, or a combination of any and all. Other financial professions – and the report breaks out accounting, interestingly enough – “distinguish themselves by the services they offer; their pricing reflects the value clients appreciate and are willing to pay for,” the report states.
“We believe that today’s investors – across the economic and generational spectrum – want advice and guidance to manage their increasingly complex financial lives,” the report continues. “The time has come for our industry to adopt a universal advice-based model built on a foundation of professional advice, trust, and integrity, and pricing models that equate to the value investors are willing to pay.”
Here’s a sampling of the report’s findings, based on an online survey of 775 respondents this past August:
- More than half (61 percent) of advisors hadn’t changed their fee structure in more than five years, due to a fear of losing clients. Two-thirds have never changed it. Responses were similar whether it was a one- or two-person operation or one with more than 20 employees.
- The majority (71 percent) of advisors said they didn’t expect to change their fee structure within the next two years.
- About 75 percent of investors of varying wealth levels never or seldom discuss fees with their primary advisor. The lack of discussion provides a significant opportunity for advisors to embrace change and to engage and educate their clients on the value of the advice they receive, the study states.
- The standard fee for services averages about 100 basis points, regardless of what services are actually provided. Baby boomers have been more receptive to that.
- Many clients just don’t know how their advisors are paid. A third of so-called mass-affluent households pay a percentage fee based on a level of assets. Almost a third pay their advisor for each transaction. And about a quarter aren’t sure how their advisor is paid.
- Here’s a head-scratcher: 14 percent of mass-affluent clients say they don’t compensate their advisor at all.
- Most Generation Y clients (64 percent) self-manage their finances, using online tools.
- Almost a third (28 percent) of millionaire clients say online tools compete with their advisor, compared to 21 percent of mass-affluent households.
- Meanwhile, more than half of millennials (55 percent) say online tools are direct competitors of their advisors. They also select lower-cost investments (paying an average of 0.39 percent in fees, less than half of those paid by boomers).
- Millennials are leery of big brokerage firms and financial institutions, and are less likely than boomers to say their advisor makes recommendations in their best interest.
- A third (30 percent) of mass-affluent clients said they’d ask their advisor for a reduced fee and would remain a customer if that was granted, while 27 percent said they’d stay even if the advisor said no.
- Among high-net-worth clients, the responses were about the same.
So how does it all shake out? That’s for financial professionals to figure out because there’s no right or wrong model, the report states.
Fees will depend on the type of clients that advisors want, their firm’s culture, and growth goals. The median age of “full-service” investors is 61, and that age factor increases a year every nine months, the report states. If advisors aren’t feeling any pressure yet, it could be they aren’t dealing with younger clients. But as boomers spend down their retirement portfolios, advisors will have to step up their business model for younger clients.
“Next-generation investors have different needs, different financial profiles, and different demands,” the report states. “The most successful advisors are devising programs for lower-net-worth millennials with a modified fee structure,” the report states. And that can include an annual retainer.
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.