Does your investor client know how much they pay in fees?

In a recent survey on investor fees by Hearts & Wallets, customers reported that they are paying for nearly half of their primary and secondary saving and investing relationships, but four out of ten don’t know how they pay in at least some of their paid relationships. In addition, about one in five mistakenly said the paid services they receive are free.

Laura Varas, CEO and founder of Hearts & Wallets, recently shared some fee trends in the industry, the rise of fee sensitivity by investor clients, and ways in which advisors can help their clients increase their understanding of the fees they pay.

Here are some of the trends shared by Varas:

Top “customer want” trends: Looking at top customer wants of their financial services firms, “fees being reasonable for the services provided” and low fees continue to be important to U.S. households, said Varas. Both wants are listed as important to 37% of households in 2024.
Over the long term, low fees have become more important to more households, increasing from 17% in 2010, up 20 percentage points, she said.

High importance of “has low fees” has increased the most for households at opposite ends of the asset spectrum – households with under $100,000 in investable assets and households with $3 million-plus. The “reasonable fees want” is up by 5 percentage points from 2010, when it was at 32%.

Pricing mechanism trends: Customers report paying something for 47% of their primary/secondary saving and investing relationships. “Sadly,” Varas added, “34% of customers don’t know how they pay, and 18% report them as free.”

The likelihood of paying something increases with investable assets. Service-based pricing for advice or investments, which has been increasing, is now as common as paying for products, customers in primary/secondary relationships reported. “Services are increasingly priced using flat fees, up 40% from 24% in 2017, primary/secondary customers report,” Varas said.

In addition, products are often perceived as free. For example, Varas explained, free savings accounts have always been a thing, but “free” is a relatively new trend in investing, having been pioneered by Robinhood in 2013, forcing other players to follow. The revenue sources used to support purportedly free offerings, such as cash float and data sharing, can be harmful to consumers, Varas said. “Many customers recognize that nothing is really free.”

The rise of fee sensitivity

Fee sensitivity is also rising among clients. Varas said that fees have always been important, and a growing percentage of households (37%) now say that “fees are reasonable for the services provided,” and “low fees” are important.

Over the long term, low fees have become more important to more households, increasing from 17% in 2010, up 20 percentage points, Varas added. High importance of “has low fees” has increased the most for households at opposite ends of the asset spectrum – from households with under $100,000 in investable assets to households with $3 million-plus. “Fees are reasonable for the services provided” is increasing in importance more slowly, up 5 percentage points from 2010, when it was at 32%,” she said.

Varas added that focus group participants in Hearts & Wallets qualitative studies are aware that prices for saving and investing solutions are trending down. Customers are increasing their scrutiny of which distribution chain layers – product and/or store – add value. Time with an expert is valuable and worth paying for and is agreed upon even by focus group participants who prefer self-service models, Varas pointed out. “Flat fee, percentage of investment, and part of the product are all seen as viable ways to price access to a dedicated financial professional,” she pointed out.

Competitive pressure to lower fees may be more intense for firms in which more of their customers place a high importance on “has low fees” than report high satisfaction. “No Hearts & Wallets Top Performer firms emerge for reasonable fees,” Varas said. “High levels of customer dissatisfaction are a retention red flag for some firms.”

Why the use of flat fees by customers is increasing

So, what is a flat fee and why is its use increasing among customers? A flat fee is a set fee, usually charged upfront or as a subscription, Varas explained. For example, she said, a financial- services customer might pay $1,000 per year for all advisory/investment services provided by the firm, vs. paying in basis points of the amount of assets invested (assets under management or AUM), which can go up or down, depending on how the assets perform.

Product-based pricing in basis points is facing compression, she added, with a year-over-year jump in relationships priced less than 50 basis points, customers reported. Conversely, service-based pricing in basis points shows resilience year over year.

Services are increasingly priced with flat fees, now at 40%, from 24% in 2017, primary/secondary customers reported, Varas said. And 17% of relationships are now priced with flat fees. Use of flat fees in service-based relationships is increasing, at 15% of relationships, up from 8% in 2017. Flat fees, and product-based relationships are rare, at 2%.

Higher-asset households reported a year-over-year jump in the use of flat fees, increasing 8 percentage points--from 6% in 2023 to 14% in 2024. Use of flat fees is more common in households with fewer investable assets but is increasing at a slower pace than for households with more investable assets. Flat fees are in place for nearly 1 in 5 (19%) relationships of households with under $100,000 of investable assets, customers report.

Varas added that the reasons flat fees are attractive can be found in Hearts & Wallets qualitative reports, and especially in the Explore Qualitative™ Exercise Pricing Mechanisms: Consumer Perspectives on What's Worth Paying for, Preferred Ways to Pay, and Surprising Attitudes to "Free” from the series Money Movement & Strategic Industry Dynamics.

Benefits of using flat fees

Focus group participants said flat fees allow them to know in advance how much they will pay for services, Varas added. They also said that flat fees were more democratic, allowing all customers to receive the same level of service and access to advice and service that might otherwise only be available to wealthier households who pay as a percentage of the investment.

So why do many households believe that their saving and investing relationships are free? Focus group participants said one reason is that the companies earn money through lending assets, trading or float, Varas explained. Employers also pay in some workplace relationships, leading to confusion about what the employee is paying. “The customer not paying attention is another reason. An equally concerning reason is that companies make it difficult for the customer to see how they are paying,” she said.

In part, this lack of knowledge stems from an industry emphasis over the past 15 years on asset allocation vs. actual products in a portfolio. 113 million U.S. households are aware of the products they own today, up 58 million from 55 million in 2013, Varas explained. All age/asset range combinations show increased product awareness.

Today, starting at about $75,000 in investable assets, virtually all households-- over 90%--can estimate their portfolio allocation by product. In contrast to exploding engagement with products, consumer awareness of asset class has been flat for three years--at 77% of households nationally.

The threshold for virtually all households (>90%) being able to estimate portfolio allocation by asset class is now $2 million. “The gap between product and asset class awareness, shrinking through the years, has fully reversed,” she said.

Households don’t how they pay

Even with a growing understanding of how their portfolios are allocated by product, and not just by asset class, a sizable number of households, 34%, do not know how they pay for their saving and investing relationships (primary or secondary firm), Varas pointed out.

Digging into the 34% of “don’t knows,” 25% of households said they have no idea about how or what they pay. The next biggest component of “don’t knows” is where the customer knows that they pay through products, but they don’t know how they are paying. “This is 7% of relationships (within the 34% of overall “don’t knows”),” Varas said.

Once customers understand how they pay (through the service or the product), not knowing the amount is rarely a problem. In less than 1% of relationships, customers know that they pay for products, and that the mechanism is basis points, but they do not know the amount. “Knowing they pay for services through basis points – but not knowing the amount – is slightly more of a problem, at just over 1% of relationships, but, in general, confusion about amounts is much lower than confusion at the top line,” she said.

Consequences in lack of understanding

There are major consequences for both the customer and the firm when customers do not understand how they pay for their services, Varas said. Customer understanding of how a firm earns money is one important driver of trust, she added. At the firm level, incremental benefits to trust begin with even moderate improvement on execution. 63% of primary/secondary relationships in 2024 understand how the firm earns money, up from 54% in 2010. No, or low, understanding improved to only 15% of relationships in 2024, from 20% of relationships in 2010. Still, Varas pointed out, “8% of relationships today have very little idea of how the firm earns money.”

Improving customer understanding of fees

So, what can advisors do to help improve customer understanding of the fees they pay? “The No. 1 customer want of firms today is clear and understandable fees, now cited as important by 57% of households, up 3 percentage points year over year,” Varas said. Other customer wants that have made big jumps since last year are “unbiased, puts my interests first,” personal and investment advice, proactivity, mobile apps, and experiences of friends/family. “Clear fees and being unbiased are reliability attributes, which can boost conversion,” Varas said.

The key to improving understanding is to clarify what each product or service experience offers the client, Varas added. “Pricing should be transparent, differentiated according to the value proposition of each product/service experience. Finally, firms should improve explanations of features and pricing until choosing saving/investing options becomes the consumer purchase decision it deserves to be.”

Varas said that firms should anticipate more service-based relationships to be priced in flat fees. “Consequently, they should strengthen customer understanding of activities performed on their behalf to earn the price paid,” she added. “Firms should also address any high levels of dissatisfaction on “fees are reasonable for the services provided,” either by lowering fees or improving services.”

The survey, Wants & Pricing 2025: Top Performer Firms and Attributes That Drive Satisfaction in the Customer Life Cycle, examines the importance of wants, customer satisfaction, and pricing. It is based on the Hearts & Wallets Investor Quantitative Database, and the latest wave was fielded from Jul. 17-Aug. 9, 2024, with 5,989 U.S. households.

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