Want to win over the unadvised affluent? Try cost transparency

Nearly half of prospective affluent clients cite opaque costs as the most difficult challenge, Cerulli says.

While affluent investors generally have high levels of trust in financial advisors, many unadvised investors in that segment harbor reservations about engaging with financial professionals as a result of cost concerns.

In a new report, Cerulli Associates found that nearly half of unadvised affluent investors (46%) saw the lack of clear information on how advisors are compensated as the most daunting obstacle to working with an advisor. General expense came in a distant second, with 28% saying advisors are too expensive.

That’s in stark contrast to those already in advisor-reliant relationships, only 11% of whom expressed concerns over cost transparency, while 12% deemed advisors’ fees too high.

The dizzying complexity of advisory fee structures, which range from commission-based to asset-based fees, likely contributes to the difficulty prospective clients face in fully understanding how much they pay for financial advice.

While asset-based fees offer more predictability, Cerulli urged advisors who use other models not to shy away from thoroughly explaining the rationale behind their fees and demonstrating the added value of their advice over self-managed investing.

“Advisors must ensure their fee schedule is easy to understand and the services provided are outlined specifically so clients know exactly what they are paying for and how they will pay – while also understanding how clients wish to engage with their finances and with the advisory team,” said research analyst John McKenna.

Cerulli’s research hints at an accelerating shift from DIY investing to formal financial advice relationships. A report the firm published with SIFMA late last year found nearly two-thirds (63%) of affluent households are willing to pay for financial advice, up from 38% in 2009. Over the same period, the proportion of respondents who identified as self-directed investors plunged from 41% to 24%.

With more and more self-directed investors considering a relationship with an advisor, McKenna says more affluent individuals will be looking for advisors who truly understand their needs. To help spark those relationships, he said advisors should begin by being open about how they deliver advice, as well as the methods they use.

“Regardless of how one communicates with a prospective client, it must be transparent from the first encounter on,” he said. “This will remain critical for growing one’s book of business and building long-term, loyal relationships.”