Affluent investors in a new study from Cerulli Associates say that fee-based planning is their most preferred form of compensating their advisor, yet some investors still prefer other compensation methods.
Accommodating different levels of advice demand can create a lucrative pipeline for firms that want to turn self-directed customers into fully advised clients, Cerulli said.
Financial firms have shifted their compensation models from a mostly commission-based to an asset-related fee structure over the past decade, according to the study. This has helped improve their standing as fiduciaries in the view of potential clients, given that their compensation is tied to portfolio performance rather than to selling particular products.
Clients have responded well to this shift, with 36% of affluent investors preferring to pay a fee based on their assets under management, Cerulli’s research found.
However, some investors still prefer other compensation methods, depending on their primary firm of choice. Thirty-nine percent of Bank of America’s customers and 34% of Capital One’s prefer a commission model because of the limited, often one-time service interactions they have as banking clients, according to the study.
Meanwhile, no-fee, self-directed platforms are popular with 49% of Vanguard’s clients, and earned a 32% share of Fidelity’s and 31% of Charles Schwab’s clients.
Firms for the most part have met their potential clients’ preferred financial engagement methods, regardless of whether they are fee based, according to Cerulli. Its research showed that 33% of affluent investors compensate their provider via an asset-based fee. Twenty-one percent use a no-fee platform, and 20% use a commission-based method of payment.
“These differences between preferred compensation and actual compensation speak to the sprawling nature of primary providers in terms of the services they offer and the different types of clients they attract,” Cerulli research analyst John McKenna said in a statement.
“Self-directed platforms and commission-based payments are more likely to attract independent-minded investors who may have a substantial amount of assets with their providers, while more outsource-minded investors may prefer a fee-based financial advice relationship.”
Fee-based financial planning is becoming commonplace for financial advisors, but Cerulli’s research indicates that many clients are still comfortable with commissions and no-fee platforms. This could lead to firms missing out on younger clients who have lower asset levels but might have high incomes and a high potential for future wealth.
Discrete fee-for-service payments still have their place for one-time services, Cerulli said. Services such as financial planning for emerging affluent clients and trust services for high-net-worth clients can demonstrate what a potential advice relationship could include.
“Although asset-based fee arrangements have created a greater sense of alignment between advisor and client incentives, firms should be careful not to be limited to just one engagement option, lest they leave scores of potential clients unserved,” McKenna said.
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