Who Wants to Pay Commissions?

6/1/2021

Commissions, fixed fees, and fees based on assets managed by the advisor are the three most commonly used fee structures in the financial services industry.  Commissions previously were the most common, however that has since shifted to financial providers charging fees based on assets under management by the advisor.  What types of people are using the commission fee structure, and what makes them want that type of fee arrangement with their financial advisor?

Nineteen percent of wealthy investors have a commission fee structure for services from their advisor, according to recent research regarding fees Spectrem Group conducted.  This is where they are charged a fee for each individual transaction.  This type of fee structure is not as popular as the fee structure based upon the amount of assets under management, with 56 percent of wealthy investors paying those fees.  However, it is slightly more common than a fixed-fee structure, which only 14 percent of investors have as their fee structure.  The type of financial advisor the investor works with can make a significant difference in the type of fee structure they have.  Investors that work with a Full-Service Broker are the most likely to have a commission fee structure.  Those investors working with an Independent Investment Advisor (RIA) are far more likely to have the fee structure based on the amount of assets that are under management by the advisor. 

Wealthy investors that have a commission fee structure are more likely to manage a higher percentage of their assets without help, 37.57 percent of their portfolio, compared to 32.40 percent of the investments that investors who have a fixed fee structure manage without professional help, and 24.65 percent that those investors with a percentage fee structure manage without help.  These investors are the least likely to remember what they were given regarding fees, with 28 percent not remembering what they were provided with regarding fees from their primary financial advisor.

Fees do not play a major role in the decisions to work or not work with a financial advisor for 75 percent of these investors, the greatest percentage among any of the fee types.  These investors are also older than those investors with other fee structures, with an average age of 67 years old.  They are more likely to be a moderate investor in terms of risk tolerance and have an advanced college degree.

Knowing the type of investor that would have a commission fee structure is important, but equally important is knowing why that fee type was chosen.  For thirty percent of investors with a commission fee structure, they selected the advisor before they were even aware of the fees.  Twenty-one percent were only given the option of a commission fee structure.  Thirty-one percent of investors, however, did not want to actively trade in their account so they felt it made the most financial sense to pay a single transaction fee.  Seventeen percent of investors were not interested in paying for anything other than investment management so paying a commission per transaction was the easiest way to avoid that.

Twelve percent of wealthy investors do not know what type of fee structure they have, despite how important it is for them to be aware of how they are paying for their financial advisor’s services.  Investors should discuss fees with their financial advisor and make certain that they understand all the various fees their investments may be subject to.  Having a clear understanding of what is being charged and how it is being charged helps increase the likelihood of the investor being happy with what is being charged.