October 25, 2021, BOSTON—As investor fee awareness continues to climb, advisors are increasingly considering nontraditional fees to align their service offerings with client demand, according to the latest Cerulli Edge—U.S. Advisor Edition.
During the past decade, investor fee awareness has dramatically increased. While only 35% of investors in 2011 were aware of the fees they were being charged, by 2Q 2020, more than half (55%) of surveyed investors understood how they paid for financial advice. According to the research, Cerulli finds that most households prefer to pay for their advice via a fee (61%) (e.g., asset-based fees, financial planning fees) compared with 39% who prefer commissions. Moreover, nearly one-fifth (17%) prefer to pay for their advice via a retainer fee, and 5% prefer an hourly fee. As a new generation of investors begins to seek financial advice, Cerulli anticipates that investors will look for more nontraditional fee arrangements in line with how they currently pay for other services.
Currently, the most popular nontraditional fees are fees for financial plans, charged by almost one-third of advisors (31%). These present a significant opportunity for planning-centric advisors who want to offer their planning services independently of investment management. Annual or retainer fees and hourly fees are less prevalent, with 13% and 10% of advisors, respectively, implementing each in their practices. “The long-term potential for both fees present valuable opportunities for advisors who want to expand their advice offering to better align with their business development plans and needs of clients,” says Stephen Caruso, analyst at Cerulli.
As the industry continues the push to fee-based advice, Cerulli predicts that a growing group of advisors will move beyond asset-based fees in favor of building practices around nontraditional fees. “While the asset-based fee model may not disappear any time soon, firms should consider nontraditional fees as another avenue for their advisors to reach potential clients or optimize existing relationships,” says Caruso. “Alternative fee structures provide the opportunity to engage more effectively with younger investors—particularly children and inheritors of existing clients.”