Financial advisors in the U.S. who have made the transition from a commissions-based fee structure to one dependent on assets under management (AUM) have retained 90% of their clients, according to the findings of a new study released on Monday. This may comfort Canadian advisors pondering making a similar transition as greater fee transparency is soon to come into effect with the second phase of the client relationship model.
Oaks, Penn.-based SEI Investments Co. produced the study, Fees at a crossroads: adopting an advisory fee model that reflects your true value, after conducting surveys with advisors and investors to determine the attitudes of both groups toward various fee structures.
The report finds that 61% of advisors have not made a change to their fee structure in more than five years — and two-thirds of these advisors have never made a change to their fee structure. Of those who have changed their method of compensation, 34% were commissions-based but now use a fee-based model; another 30% say they added financial planning fees on top of their fee-based model; and 12% charge an ongoing retainer on top of their fee-based pricing.
“The decoupling of investment advice and portfolio management is underway,” says John Anderson, managing director and head of practice management services with SEI’s advisor network, in a statement. “The time has come for our industry to adopt a universal advice-based model built on a foundation of professional advice, trust and integrity, and pricing models that equate to the value investors understand and are willing to pay.”
The study also finds that three-quarters of investors never or rarely discuss fees with their advisors, which indicates the conversation is an uncomfortable one for both advisors and investors, according to the research.
“Avoiding the fees discussion does not benefit advisors or their clients,” says Anderson. “By keeping the fee and pressure-point dialogue open, it’ll allow advisors to clearly articulate a value proposition that clients understand and are willing to pay for. This is particularly true given the growth of cheaper online but less-personalized advice.”
In fact, many investors surveyed indicate they would remain with their advisors even if they were informed of fees and felt those fees were too high.
For instance, more than one-quarter (27%) of mass-affluent clients say they would ask their advisor to lower his or her fees but would stay even with the advisor if this did not occur while 22% indicate they would not say anything to their advisor about the fees and would not change advisors.
Among high net-worth (HNW) investors, more than a quarter would stay with their advisor even if they asked their advisors to reduce fees and the request was declined. Less than one-fifth (16%) state they would ask for a fee reduction and would leave if the answer was no.
The survey gathered the responses of 775 advisors and 539 households in the U.S. in August 2015. A mass-affluent household is defined as one with between US$250,000 and $999,999 in investible assets while an HNW household has US$1 million or more in investible assets.