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February 21, 2019 at 03:30 PM
Discussion about compensation with clients is never easy, but advisors can take some relief that clients who rely on their advice are happier with fee-based models than commission models. In fact, 62% of investor households prefer fee-based payment arrangements over commissions, a Cerulli Associates study found.
That figure includes self-directed investors. For those who rely on advisors for investing guidance, the share is even higher.
Source: Cerulli Associates
Investor preference has shifted in the last seven years, the study found. In 2011, 27% of all investor households preferred to pay a fee based on assets under management, while 44% preferred a commission arrangement. (The remaining investors preferred to pay a retainer or hourly fee.) In the third quarter of 2018, 36% of investors preferred AUM fees, while 38% preferred commission only.
Another big change: investor awareness of fee structures. Whereas in 2011, only 10% of investors were aware of fee-only models (18% were aware of commission models), in 2018, 34% were aware of fee-only structures while 22% were aware of commission models.
Of course, who the investor was made a difference. There was a major “bifurcation” between do-it-yourselfers who preferred to tie costs or commissions to a specific activity, and advisor-assisted/directed investors, who preferred a fee-based model.
Other points of the study were:
- Development of fee-based programs signals the transition of stockbrokers to advisors.
- Movement toward fee-based models will continue as advisors move toward being “client partners in pursuit of long-term goals rather than transaction facilitators.”
The study, an online survey of 10,000 households, was was done in partnership with Phoenix Marketing International.
Fee-Based Asset Growth
The Cerulli study also found rapid growth of fee-based assets between 2008 and third quarter 2018. Overall fee-based assets grew to 45% from 26% of total advisors’ assets. Although broker commission-linked assets still are the bulk of the fee business, total fiduciary/AUM fee-linked assets are closing in fast. In 2008, brokerage/commission assets were $7.5 trillion, while fee-linked assets were $2.6 trillion. In 2018, brokerage commission-linked assets were $11.2 trillion, versus fee-linked assets at $9 trillion.
Source: Cerulli Associates, The Cerulli Edge – U.S. Retail Investor Edition, 1 Q 2019 issue
The study found one problem with fee-based models tied to AUM: a “hazard of ‘reverse churning,’ wherein advisors were not delivering the ongoing care and maintenance of portfolios intrinsic in fee-based advisory accounts,” according to Cerulli. “Just as commissions can incentivize marginally necessary transactions, AUM fees can bias advisor toward inactivity.”
