It is one of the oldest adages in commerce: You get what you pay for.
That adage comes to mind every time an investor gets a bill from or makes a payment to their financial advisor. Investors take into consideration the fees they pay when they work with an advisor, and those investors know that in exchange for an advisor’s efforts to improve the value of their assets and increase their net worth, there will be a payment required.
There are different feelings investors have regarding fees. There are investors who think all fees are too high, some investors who make fees a consideration in selecting an advisor to work with, and some investors who accept fees as the price of doing business (as long as their portfolio is growing).
In Spectrem’s recent research report Advisor Relationships and Changing Advisor Requirements, investors explain how they feel about the fees they pay advisors. Across three wealth segments, a majority of investors claim they are comfortable with the fees they pay advisors while approximately one-third of investors say fees don’t matter as long as their assets grow.
“It is incumbent upon advisors to explain the fees being charged to investors, and demonstrate the value of your services in order to make the fees seem appropriate,’’ said Spectrem president George H. Walper Jr. “Our research shows that investors who are satisfied with the performance of their advisor are unlikely to complain about the fees they pay.”
For instance, among Mass Affluent investors (with a net worth between $100,000 and $1 million not including primary residence), 55 percent are comfortable with the fees they pay advisors, and 30 percent are unconcerned about their fees as long as their assets are growing. Among Millionaires with a net worth between $1 million and $5 million, the percentages are the same or higher: 55 percent and 33 percent. Among Ultra High Net Worth investors with a net worth between $5 million and $25 million, the percentages are higher again: 61 percent and 35 percent.
The relationship between fees and performance is less concerning among investors who are more dependent upon their advisor’s services. Among Millionaire investors who self-identify as Advisor-Dependent, 59 percent are unconcerned about their fees, and among Millionaire Advisor-Assisted investors, 46 percent are satisfied with their fees as long as performance is appropriate.
Those responses come despite the fact that more than half of all investors find the fees paid to a professional advisor to be expensive. It makes sense that 56 percent of Mass Affluent investors would find advisor fees to be expensive, but even 52 percent of Millionaires and 52 percent of UHNW investors consider fees to be expensive.
In fact, it is expense which is stoking the virtual advisor business. Algorithms that can provide investment advice are much less expensive than humans doing the same thing.
It makes sense that younger investors and investors with lower net worth would be more apt to describe advisor fees as expensive. Likewise, investors with a higher degree of dependence on their financial advisors are more likely to be comfortable with the fees they are charged.
There is also wide disparity related to how fees are determined. Investors disagree on whether fees should be charged as product commissions, charged on a per transaction basis, or charged as a percentage of assets controlled.
Top Takeaways for Advisors
Investors expect to pay for the services of an advisor. In fact, that expectation sometimes keeps investors away. It’s imperative that advisors show investors that the benefits they receive in working with an advisor more than compensates for the fees they are paying.
While transparency is important, the reality is that many investors still do not understand exactly what they are paying. To the extent that they have a greater understanding of their fees, most investors actually become more comfortable with what they are paying.
When approaching prospects, make sure that fees are explained simply and that it’s clear that the fees may not come directly from their bank account but from their investment return (depending on your particular fee model). Many investors do not use advisors because they are fearful about paying the fees.
*According to Spectrem research, there are currently 29.8 million households with $100,000 - $1 million in net worth (not including primary residence, NIPR). There are 9.1 Millionaire households ($1 million - $5 million net worth, NIPR), 1.21 million Ultra High Net Worth households ($5 million - $25 million net worth, NIPR) and 145,000 households with more than $25 million in net worth, NIPR.