Most financial advisors compensated using fee-based models

Most financial advisors are compensated by fee-based models, and by 2026, more than three-quarters of the wealth management industry is expected to operate on a fee-based model, according to the latest Cerulli Edge—Americas Asset and Wealth Management Edition.

This movement toward fee-based services is driven primarily by a transition from commissions to asset-based fees among the wirehouse and broker/dealer (B/D) channels, the survey said. In sharp contrast, commission-based revenues have declined to just 23% of an average advisor’s revenue, and advisors expect this to decline further over the next few years.

Why are fees so popular?

“We have seen a continuing trend of more and more advisors shifting to fee-based over commission-based practices over the last few years,” said Kevin Lyons, senior analyst, wealth management, Cerulli Associates, and Andrew Blake, associate director, at Cerulli Associates.

“For context, advisors currently (2024) receive an average of 72.4% of their revenue from asset-based fees, which they expect to increase to 77.6% by 2026, mainly at the expense of commissions.”

“In 2024,” Lyons and Blake continued, “commissions accounted for 22.8% of an advisor's compensation and are expected to fall to 16.6% by 2026. The benefits for both the advisor and the client are that they are essentially now sitting on the same side of the table and can equally benefit from the growth of a portfolio, as opposed to a one-time, commission-based fee paid upon a specific purchase of a security.”

Why offer alternative payment methods?

Although many clients prefer fee-based pricing, advisors offer alternative fee structures as well to appeal to a wide group of clients across all ranges of investable assets. “While asset-based fees are on the rise, they are not suitable in every situation,” said Blake. “Alternative fee structures, such as annual or hourly fees, can provide greater flexibility in client service and a competitive advantage for firms in the fee-based business model.”

In addition, alternative fee structures and giving clients the option to receive various planning services in one location can distinguish advisors and appeal to investors, the survey said. More than one in five advisors (21%) reported charging for financial plans and receiving a portion of their revenue from the associated fees, making this the most common nontraditional fee arrangement. Only 3% of wirehouse advisors reported receiving revenue from fees for financial plans. But this figure rises to 38% in the insurance B/D channel, and 35% in the independent B/D channel.

Advisors must understand how the next generation of clients prefers to be engaged and serviced, Lyons and Blake said. “Once accepted without question by previous generations, legacy pricing structures may not be suitable for this new wave of clients.” Advisors must continue reinventing themselves by recognizing the services in demand from younger clients and adjusting their pricing and cost structures accordingly, said Lyons and Blake. Although charging clients alternative fees, such as flat fees or subscription models, has been widely discussed recently, these methods have not been adopted extensively. For example, they pointed out, fees for financial plans (1.7%), annual or retainer fees (1.7%), hourly fees (0.7%), and subscription fees (0.3%) make up just 4.4% of an advisor's revenue on average.

In determining how to charge their clients for the various services that they offer beyond investment management, Lyons and Blake said that flexibility is the key aspect. Ultimately, advisors must evolve in an environment where fee compression persists across the industry, and clients and prospects are more inclined to expect more services and optionality when it comes to pricing. “Advisors must be clear in their value proposition and services offered, while understanding that client expectations are also evolving. By doing this, they can better communicate their value and ultimately determine how and what they will charge for their services,” they said.

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