Asset-based fees are still the norm for most advisors, according to survey data, despite pressure to change fee models.
Forty-five percent of 286 advisors surveyed by FA-IQ sister publication Ignites Research charged only asset-based fees in 2021, up from 41% in 2019.
Advisors who charged a percentage of assets, whether in total or as part of fee structures available to their clients, also rose, to 92% last year from 90% in 2019, according to the survey conducted by Ignites Research in December and January.
However, clients are increasingly demanding personalization of services from their advisors and asking them to justify their fees. Clients with $750,000 paid an average of 1.04% of investable assets in 2020, while clients with $10 million paid an average of 0.62%, according to data from Cerulli Associates.
“The AUM model continues to grow, both by drawing advisors who had used commissions and by attracting advisors who had tried flat fees or other models and returned to straight AUM,” according to Loren Fox, research director at Ignites Research.
“The past two years have been an unusual time, with the plunge in in-person interactions mixed with volatile markets and investors having more time to think about their finances. And so, it’s not clear how many of these trends will continue into 2022 and 2023,” Fox added.
Lower estimated stock market returns and a proliferation of alternative financial advice pricing models are making the future of the typical 1% investment advisor fee uncertain, according to analysts and industry executives.
‘Increasing Focus on the Personal’
Among advisors who charge a flat fee or an hourly fee, 64% did so for financial planning services in 2021, double the 32% who did so in 2019, the Ignites Research survey shows.
“There are two trends at work here. On one hand, advisors have been increasing their emphasis on financial planning and other more personalized service in order to justify their fees and differentiate themselves from robo-advisors and pure investment solutions,” Fox said.
“On the other hand, investors have been more interested in financial planning as remote work and the pandemic have inspired more folks to assess their finances and think more seriously about retirement, estate planning and what matters to them. There’s an increasing focus on the personal in personal finance, and that’s healthy,” he added.
Also among advisors who charge a flat fee or an hourly fee, 21% did so for retirement plan consulting in 2021, sharply higher than 1% in 2019, according to the Ignites Research survey.
The increase is partly explained by the increase in advisors specializing in retirement plans surveyed in 2021 compared with 2019 and partly by an emerging trend, according to Fox.
“More employers are seeking advice on their 401(k) and similar plans as two forces converge,” Fox said. “On the regulation side, the past few years have seen changes in [Department of Labor] guidance and then reversals on some earlier guidance. On the HR side, retirement benefits have emerged as another tool to recruit staff in a tight labor market.”
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