Study: Consumers favor flat fees for financial planning, investment services

Flat fees are emerging as a favored way for consumers to pay for financial planning and even for investment management, according to a new Hearts & Wallets market intelligence report.

The report, “Pricing Mechanisms: Consumer Perspectives on What’s Worth Paying for, Preferred Ways to Pay, and Surprising Attitudes to 'Free,' ” explores how consumers think they should pay, if anything, for different services and products to inform pricing strategies going forward. Using national focus groups, the qualitative report examined which of five pricing mechanisms – percentage of investment, flat fee, commissions, part of the product, or free – were perceived to be the best ways to pay for the following financial services:

• Guidance on asset allocation
• Investment management
• Personal financial planning
• Dedicated financial professional
• Motivational support

The report noted that this examination was especially important, given the fact that over one third (36%) of consumers do not know how they pay for their primary and secondary saving and investing relationships, and in 20% of relationships, customers believe their saving and investing solutions are free.

The appeal of flat fees

Flat fees are appealing because consumers appreciate their transparency, said Hearts & Wallets’ CEO and Founder, Laura Varas, in explaining why consumers find flat fees so attractive. The consumer knows exactly what they are paying. That’s important because there’s a lot of confusion around pricing.

In addition, Varas said, over one third (36%) of consumers do not know how they pay for their primary and secondary saving and investing relationships, and in 20% of relationships, customers believe their saving and investing solutions are free (according to the Hearts & Wallets’ quantitative research report, Wants & Pricing 2023, issued in February).

Focus group participants today acknowledge the fact that “the company needs to make money,” added Varas. “If the product/service offering is “free,” they say, the company must be making money through hidden fees. Because of this, some focus group participants say they now prefer to pay directly themselves; so, they don’t have to worry about kickbacks or incentives going on behind the scenes. Flat fees accommodate this desire, “she said.

In particular, Varas added, consumers in these focus groups prefer flat fees for financial planning. They also see flat fees as a way to pay for investment management, pretty much in a tie with percentage of investment (usually basis points, or bps), and commissions.

What’s surprising is how receptive these consumers are to flat fees, Varas said. “We’ve been tracking flat fees for a number of years,” she noted.

“About 10-12 years ago, consumers in our qualitative research started to mention flat fees," she said, adding, "In our qualitative research of over 5,000 U.S. households, only 10% of households said their saving and investing relationships were priced in flat fees. In 2022, 15% said these relationships were priced in flat fees. Flat fees have grown to become nearly as common as bps, and use of flat fees is growing while use of bps declined for the first year since tracking began (Wants & Pricing, 2023).”

Impact of a widespread shift to flat fees

So, what are some of the effects of this movement ? “We are seeing fee compression, and flat fees are one reason for this,” Varas said. “Firms need to consider how to help consumers understand pricing – whichever way they currently price. Consumers told us they’d rather pay the costs to firms directly themselves than have the costs taken out behind the scenes.”

While a lot of current flat fee pricing is for lower-asset households, wealthier households with $1 million or more in investable assets said that they found flat fee pricing attractive, especially for financial planning, Varas said. Certain new entrants/fintechs offer flat fees or subscriptions. For example, Facet offers subscription-based comprehensive financial planning services with investment management offered nearly for free. Options for flat fees as a payment method will continue to grow, she said.

Effects on revenue

And how will flat fees impact a company’s revenue? Varas said that they are both a threat and an opportunity for the industry. “As far as revenue, if flat fees are set too low, this could have a devastating effect on industry revenue,” she said.

Flat fee dominance is not something that will be seen in the immediate future, but they will continue to change the industry, she added. Pricing changes every 10 to 20 years. “You may recall the dramatic shift when we went from commissions to fee-based basis points,” she pointed out. “No pricing mechanism is inherently good or bad, nor does any single pricing mechanism dominate forever. On the upside, more transparent pricing can bring more households into the advice marketplace. The price might be lower, but that could be offset by an increasing number of clients.”

Key learnings

Here are some of the major findings from the report:

•  Today’s consumer talks about pricing more rationally than in the past, acknowledging the fact that a firm “needs to make money.”
• Flat fees are a preferred way to pay for several services/products.
• “Free” services are appealing, but consumers often believe there’s a catch, and they identified four reasons why companies can offer free services/products.

The report is drawn from the Explore Qualitative™ Database, which supports firm initiatives to foresee how unmet needs may change the competitive landscape. The Explore 2023 nationwide focus groups were held in Los Angeles, Minneapolis and Boston in the spring. All 72 participants were actively involved in money movement, either having recently concluded a transaction or considering one in the next 12 months. The groups included participants ages 35 to 64 with sole or shared responsibility for investment decisions and over $250,000 in investable assets (excluding the primary residence) and over $50,000 outside their workplace retirement.

Ayo Mseka has more than 30 years of experience reporting on the financial services industry. She formerly served as editor-in-chief of NAIFA’s Advisor Today magazine. Contact her at [email protected]. 

© Entire contents copyright 2024 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.