Millennial investors often take the heat for not putting enough money aside for retirement. But new research has found these young investors don’t get nearly enough credit for taking on advisors over fees.
And who can blame millennial investors for casting a cold, skeptical eye on advisor fees?
Millennials have matured in an age of $7 trades and pricing transparency enabled by the Internet. They feel comfortable investing through computer-based algorithms and they have bought into the low-cost indexing. All of these factors have helped pressure advisor fees.
“Both the media and the emergence of digital advisors have shed light on the high cost of investing,” said Tom O’Shea, associate director at Cerulli Associates.
When it comes to fees, the contrast between millennials and baby boomers couldn’t be any starker, Cerulli researchers found. Their findings were reported in this month’s issue of The Cerulli Edge – U.S. Edition, titled “Survival in a Low Fee World.”
Only 12 percent of investors under the age of 30 do not understand how they pay for advice or or they believe financial advice is complimentary, Cerulli researchers found.
Contrast that with the 54 percent of households headed by someone over the age of 60 who do not understand how they pay their advisors or believe the advice they receive his somehow free.
“The Future Will be Different”
If older, wealthier investors who make up the bulk of a financial advisor’s client base can’t be bothered with pinning down advisors about fees, advisors shouldn’t expect that habit to continue with millennials, the researchers wrote.
“The future will be different,” the Cerulli researchers write in the report. “As younger investors’ wealth grows to comprise a greater proportion of investable assets, pricing pressure will increase.”
As millennials take a deeper interest in how and what advisors charge for fees, advisors appear to be moving still further into selling products and services based on fees and away from commissions, the research found.
A survey of asset managers found that 64 percent said advisors plan to increase their use of I-share fee-based investment product classes over the next 12 months, according to Cerulli.
In addition, 50 percent of asset managers expect advisors will increase their use of platform/wrap share classes, which is also fee-based, in the next 12 months.
By contrast, 67 percent of asset managers said they expect advisors will decrease their use of A-share investment classes, and 54 percent of advisors said they expect advisors to cut back on their use of C-share classes.
A shares and C shares refer to commission-based fund expenses.
“During the past several years, the magnitude of fees has become a challenge that directly affects the way in which financial advisors construct client portfolios,” O’Shea said.
Advisor Revenue Models Shift to Fees
Between now and 2018, advisor compensation is expected to shift further still toward asset-based fees and away from commissions, Cerulli researchers indicate.
On average, advisors anticipate that the percentage of revenue earned from asset-based fees will rise from 59 percent in 2016 to 66 percent by 2018.
Revenue derived from commissions will drop from 32 percent to 23 percent over the same period as more fiduciary relationships take hold, the research found.
Advisors may also look to relieving the pressure on asset-based fees by looking to other fees — hourly fees, retainer fees or fees for financial plans — consultants said.
Even more reason then for millennials to stay alert to advisor fees, as organic asset growth among registered investment advisors (RIAs) has dropped to its lowest level in five years, a 2016 Fidelity RIA Benchmarking Study found.
Investor preferences, technologies and regulation “will require advisors to consider fresh pricing formulas to remain competitive,” said David Canter, executive vice president, practice management and consulting with Fidelity Clearing & Custody Solutions.
New pricing formulas will surely involve fees, which is why advisors had better be ready to answer tougher questions about fees from younger investors.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at email@example.com.
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