Investors are more likely to understand the cost of advice than they have been historically — causing more advisors to redefine how they add value.
The percentage of investors who either believe that their advice is free or are unsure how they pay for advice has fallen from 65% in 2011 to 42% in 2018.
Advisors also report heightened fee sensitivity from their clients. Close to three-quarters of advisors agree or strongly agree that, compared with five years ago, prospective clients are now more sensitive about fee levels.
These findings and more are from the April 2019 issue of The Cerulli Edge — U.S. Asset and Wealth Management Edition, which explores how advisors are reacting to this increased fee awareness among investors.
“Given that investors are increasingly cognizant of how they pay for advice (and merely, of the fact that they pay for it), financial advisory firms are pushed to justify their fees by expanding their definition of the financial advisor’s value,” the report states.
To remain competitive, according to Cerulli, advisors must evolve their definition of advice to include nonfinancial aspects of the client’s life and curate a meaningful experiential process for their clients.
Ultimately, investors’ fee awareness requires advisors to focus on client experience to capture measurable advantages.
“The client experience is a holistic perspective that encompasses a client-centric mentality (i.e., What is the client’s perspective?), reliability and repeatability (i.e., Is this a consistent process that reliably results in the same experience for clients?), and surpassing expectations (i.e., How can the firm go above and beyond to address latent or unarticulated client needs?),” according to Cerulli.
Cerulli notes that this demands a mindset transformation “from being an investment consultant to a life coach.”
According to Marina Shtyrkov, research analyst at Cerulli, satisfied investors think an advisor’s integrity and the overall relationship outweigh expertise or investment performance.
“Although acumen and investment performance are valuable, practices that emphasize only these elements may be misaligned with the true drivers of investor satisfaction,” Shtyrkov added.
According to the majority of retail investors, transparency (73%), understanding of needs and goals (67%), and promptness of requested follow-ups (66%) are paramount to advisory relationship satisfaction.
Experience-centric practices also exhibit measurable business advantages, according to Shtyrkov.
“Experience-centric practices exhibit stronger results than their peers across a series of metrics, including a higher median client size, lower asset attrition, a broader service set, and greater likelihood to target affluent clients,” Shtyrkov said in a statement.
By outpacing their peers in these categories, experience-centric practices demonstrate that advisors can harness the power of their client experience to increase retention, reduce attrition, and generate a strong referral system, Shtyrkov added.
In addition to the growing fee awareness, willingness to pay for advice has also increased since 2009.
As of the second quarter of 2018, 53% of investors agree that they are willing to pay for investment advice. This is a 15 percentage-point increase from 2009, when only 38% of investors expressed such willingness. Overall, 76% of investors agree or strongly agree that the value they receive from financial advisors is worth the expense.
According to Cerulli, advisors can capitalize on this desire for advice, but they must clearly justify the price tag.
“While clients understand that advice comes at a cost and many believe it is worth its expense, if the cost-benefit of engaging with an advisor is not clear, they are more likely to opt for other providers,” Shtyrkov said in a statement.
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