A recent study conducted by research firm Cerulli Associates has shed light on a crucial factor that financial advisors should focus on when trying to attract new clients who currently do not have an advisor: cost transparency.
According to the study, 46% of prospective clients expressed concerns regarding the lack of transparency surrounding costs and fees associated with financial advisors. These clients were unsure about how much they would be paying for the services provided by the advisor. In comparison, smaller percentages of respondents cited other obstacles, such as 28% claiming that advisors are too expensive, and 20% finding it difficult to locate a trustworthy advisor.
Cerulli, based in Boston, acknowledges the complexity of compensation structures within the advisory industry. This complexity often leaves clients confused about payment methods, the amount they will be charged for financial guidance, and the specific type of advice they can expect to receive.
The lack of cost clarity is evidently inhibiting financial advisors from acquiring new clients. Cerulli identifies a significant pool of Americans who embarked on investment activities during the pandemic and are now actively seeking financial advice along with a more hands-off approach to investment management. Cerulli's survey, which involved over 1,600 investors, highlights this growing demand for transparent and affordable financial expertise.
By addressing the issue of cost transparency head-on, financial advisors can position themselves favorably in the eyes of prospective affluent clients seeking reliable and trustworthy guidance for their financial goals.
Understanding Your Financial Advisor's Compensation
"As more investors transition from being solo traders to seeking formal financial advice, they will want an advisor who understands their needs," said John McKenna, a research analyst at Cerulli. "That begins with the advisor being open not only about how advice delivery is carried out, but also the methods through which it is delivered."
Various Types of Financial Advisor Compensation
Financial advisors utilize different types of compensation structures. Some charge a fee based on assets under management (AUM), while others rely on commissions. There are also advisors who combine both commissions and fee-based AUM for ongoing advice. Additionally, wealth management firms can receive compensation through revenue sharing and other forms.
Fee Discounting and Asset Amounts
To add further complexity, advisors sometimes offer fee discounts to clients with large amounts of assets under management. For instance, according to Cerulli's study, a client with $750,000 in investible assets pays an average annual advisory fee of 1.04% of AUM. However, the average AUM-based fee does not drop below 1% until clients invest at least $1.5 million with their advisor.
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