Research reveals asset-based fees well-entrenched among advisors, but alternative fee models could unlock opportunities
Amid an increasing awareness of costs and fees among clients, advisors are increasingly adopting fee-based models of compensation. And while the asset-based model continues to it’s not just asset-based fees they ought to be looking at.
According to new research from Cerulli Associates, fee awareness has grown among investors in the U.S. over the past decade. Compared to just 35% of clients with advisors in 2011 being aware of the fees they were being charged, Cerulli found more than half 55% of surveyed investors in Q2 2020 were conscious of the fees they were paying.
Looking at how households chose to compensate advisors, it said 61% preferred to pay for advice through a fee-based model, including asset-based fees and financial planning fees, while the rest (39%) favoured commissions. Nearly a fifth of respondents (17%) were partial to a retainer fee, while 5% expressed an inclination towards hourly fees.
On the other side of the table, the research found a significant number of advisors still relied on the asset-based fee model. However, almost a third of advisors (31%) charged fees for financial plans, likely reflecting a shift in the industry towards planning services that are decoupled from investment management.
“While the asset-based fee model may not disappear any time soon, firms should consider nontraditional fees as another avenue for their advisors to reach potential clients or optimize existing relationships,” said Stephen Caruso, an analyst at Cerulli.
In its research, the firm found that in 2020, 74% of advisors’ clients on average received comprehensive ongoing planning advice or targeted planning to address a specific need. By 2022, the firm projects 80% of clients will be receiving some kind of planning advice.
As planning-focused practices proliferate, Cerulli said advisors are taking the opportunity to concentrate more of the value of their advice into financial planning and go further beyond investment management. Decoupling financial planning services from investments, it added, lets advisors create a new business channel through which they could derive a more predictable revenue stream.
Other alternative models used by advisors include subscription pricing, which opens the door for advisors to provide advisory services for clients whose business would be unsustainable under a standard asset-based fee model. Annual or hourly fees were also used by 13% and 10% of advisors, respectively.
“The long-term potential for both [annual and hourly] 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,” Caruso said, adding: “Alternative fee structures provide the opportunity to engage more effectively with younger investors—particularly children and inheritors of existing clients.”
