It is one of the oldest adages in commerce: You get what you pay for.
That adage is recalled 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 payment, advisors are working to improve the value of their assets and their net worth.
In Spectrem’s third quarter wealth segmentation study Advisor Relationships and Changing Advisor Requirements, investors explain how they feel about the fees they pay advisors. While a portion of investors consider the fees to be expensive, they agree that the fees are not outlandish as long as the advisors are doing their job of increasing their assets.
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.
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’s a three-pronged issue,’’ said Spectrem President George H. Walper Jr. “Investors do have to pay their advisors, and no matter how those fees are determined, they are not inexpensive. Investors determine whether they are willing to pay those fees, and when the advisors do their job and improve the bottom line of the investor, those fees become less of a concern.”
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.