Cerulli: Affluent Investors Favor Fee-Based Planning but Some Still OK With Commission Models

Affluent investors said that fee-based planning is their most preferred form of compensating their adviser, according to the latest Cerulli Associates research, yet many investors still choose commission-based or no-fee services.

Accommodating these varying levels of advice demand can create a lucrative pipeline for firms looking to turn self-directed customers into fully advised clients, reported the international research and consulting firm in the Cerulli Edge – U.S. Retail Investor Edition.

To assess the needs, preferences, and behaviors of affluent and near-affluent investors, Cerulli created the Cerulli Affluent Investor Tracker, or CAIT, which specifically targets two segments of investors of significant interest to financial services providers: affluent investors, with more than $250,000 in financial assets, and the near affluent, who earn more than $125,000 annually and are younger than age 45. The affluent investor segment, therefore, is wealthier and older than the aggregate U.S. population.

For the past decade, financial firms have shifted their compensation models from largely commission-based to an asset-related fee structure. This has helped improve the standing of financial firms as fiduciaries in the eyes of potential clients, given that their compensation is tied to portfolio performance rather than to selling particular products. Clients have responded well to this shift, with fee-based payments preferred by 36% of affluent investors.

Although fees may be the most preferred form of compensation, some investors still prefer other compensation methods. Cerulli found that 33% of affluent investors say they compensate their provider via an asset-based fee – just three percentage points lower than the 36% who indicated that they prefer this type of fee; 21% use a no-fee platform, and 20% use a commission-based method of payment – just five and three percentage points lower than the shares who prefer these methods, respectively.

“These differences between preferred compensation and actual compensation speak to the sprawling nature of primary providers in terms of the services they offer and the different types of clients they attract,” says John McKenna, research analyst at Cerulli Associates. “Self-directed platforms and commission-based payments are more likely to attract independent-minded investors who may have a substantial amount of assets with their providers, while more outsource-minded investors may prefer a fee-based financial advice relationship,” he adds.

While fee-based financial planning has become commonplace for financial advisers, Cerulli’s research indicates a substantial number of clients are still comfortable with commissions and no-fee platforms. “Although asset-based fee arrangements have created a greater sense of alignment between adviser and client incentives, firms should be careful not to be limited to just one engagement option, lest they leave scores of potential clients unserved,” concludes McKenna.

Also within the research, Cerulli found that 64% of affluent investors are satisfied enough with their provider that they have no desire to seek a new one, while 34% are looking for a new partner despite otherwise being satisfied with their current arrangement. Among the 20 most frequently used primary firms in the CAIT, Raymond James had the most satisfied clients at 81%, as well as the highest percentage, 93%, of those who said their provider must always act in their best interest.

Headquartered in Boston, Cerulli Associates is an international research and consulting firm that provides financial institutions with guidance in strategic positioning and new business.

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