The shift from asset-based compensation signals a transition from transactional to long-term client relationships
The debate over advisor compensation has continued to rage in Canada, with a proposal by the Canadian Securities Administrators (CSA) to ban certain types of commissions being stopped in its tracks by unexpected opposition from Ontario last year. But if findings from a study of US investors are any indication, it seems the future of the financial advice industry lies in fee-based models.
A study by Cerulli Associates has found that 62% of investor households, including self-directed investors, prefer fee-based payment arrangements over commission models, reported ThinkAdvisor. The share is even higher among advisor-assisted and advisor-directed investors, who showed a total “fee preference” of 74% and 87%, respectively.
The poll also found a significant shift compared to 2011, when a reported 27% of all investor households preferred a fee based on AUM, compared to 44% who wanted a commission arrangement. As of Q3 2018, 36% of investors preferred AUM-based fees, while 38% would opt for a commission-only structure.
Investors have also grown more keenly aware of fee structures over the years. In 2011, only 10% of investors expressed an awareness of fee-only models while 18% were aware of commission models; in 2018, awareness of fee-only structures and commission models shifted to 34% and 22%, respectively.
The fact that more firms are developing fee-based programs, the study added, suggests a movement from stockbrokers to advisors. And as advisors move toward being partners in their clients’ pursuit of long-term goals, as opposed to being mere transaction facilitators, the shifvst toward fee-based models is expected to continue.
Fee-based assets have undergone a decade-long rise, advancing from 26% of total advisors’ assets in 2008 to 45% in Q3 2018, according to Cerulli. And while broker commission-linked assets still have the lion’s share of the business, total fiduciary/AUM fee-linked assets are gaining: as of Q3 2018, brokerage/commission assets amounted to US$11.2 trillion, while fee-linked assets stood at US$9 trillion.
But fee-based models that depended on AUM, the study noted, faced the potential for “reverse churning” from advisors who do not deliver ongoing care and maintenance of portfolios.
“Just as commissions can incentivize marginally necessary transactions, AUM fees can bias advisor toward inactivity,” Cerulli noted.
But that doesn’t seem to be a concern for clients in such arrangements as 65% of them agreed that the financial-services firms they hold accounts with look out for their best interest. Those who pay in hourly fees were even more positive, with 74% believing their best interest is being protected. On the other hand, only 34% of commission payers thought the same about their firms — the lowest level of trust expressed among all groups.
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