Advisory fees push commissions further into the background

Fee-based advice is not perfect, but most clients prefer it over a commission-based option

Feb 19, 2019 @ 2:35 pm

By Jeff Benjamin

When there's a financial professional in the picture, investors mostly prefer paying fees based on assets under management.

The latest research from Cerulli Associates found that clients seeking investment advice from financial professionals have largely warmed to the idea of their adviser joining them on the side of the table that benefits when portfolios rise and suffers when portfolio balances fall.

Cerulli's survey of more than 8,000 investors with at least $250,000 worth of investible assets shows that 61% of clients prefer paying fees based on assets under management in adviser-directed accounts, while 13% of clients prefer commission-based fees.

Retainer fees were preferred by 22% of clients, and 4% preferred paying fees by the hour.

On the other end of the spectrum, 56% of self-directed investors prefer to pay commissions, which compares to the 16% of self-directed investors who would prefer paying a fee pegged to the size of their portfolio.

Cerulli director Scott Smith said the research found that investors' appreciation for asset-based fees increased in relative proportion to an adviser's involvement in managing the portfolio.

In relationships identified as adviser-assisted, 47% of clients said they preferred asset-based fees, 23% preferred retainer fees, and 4% wanted hourly fees.

But 26% opted for commission-based fees in adviser-assisted relationships when the client has the final say on investment decisions.

"Investors who regularly work with advisers are more likely to indicate a preference for asset-based, retainer or hourly fees," Mr. Smith said.

Fee models have long been among the most sensitive issues for financial planners, who continue to wrestle with the topic as the planning profession evolves.

According to Cerulli, the percentage of fee-based assets across all advisory channels increased from 26% in 2008 to 45% at the end of 2017, and the research suggests that trend will continue "as providers increasingly position themselves as clients' partners in pursuit of long-term goals rather than transaction facilitators."

But just as some advisers are getting comfortable making the case for asset-based pricing, the industry is evolving toward models that take the emphasis off asset management.

Eliza De Pardo, a management consultant for TD Ameritrade Institutional, estimates that 98% of all advisory clients are charged under a pure asset-based pricing model, and 80% of all advisory firms include in those fees services other than asset management.

The Cerulli data and the TD data are not comparable, because the TD data is looking at advisory firms that rarely charge commissions.

But the evolution of fee models is present in both sets of research.

Ms. De Pardo's message was that using fees tied to assets under management can make it difficult for an advisory firm to separate and distinguish all the other services it provides beyond asset management. It can also make it more difficult to raise fees, especially during periods when markets are declining, she added.

The other downside of asset-based pricing is that it limits the market of potential clients to those who already have a lot of money that needs managing.

For that reason, Ms. De Pardo suggests advisory firms experiment with multiple fee models, which might include hourly, or flat fees, to set up a plan for younger clients who might have more debt than assets, but still appreciate quality financial advice.

Mr. Smith agrees that fees need to continue to evolve. But, particularly at the wirehouses, where there is still a strong commission-based environment, he said that evolution will take time.

"There is more traction for hourly and retainer fees with advisers and clients who are under age 40 and are already used to paying monthly fees for other types of services," he said. "But switching right over from commissions to retainer fees is like teaching an old horse a new trick and then making him dance."

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