Wealth advisors aiming to attract new clients currently without advisory services should prioritize clear communication regarding their fee structures, as suggested by Cerulli Associates' recent research. This transparency in disclosing costs and fees emerges as the principal barrier for affluent prospects contemplating engagement with financial advisors.
The study by Cerulli, a Boston-based research firm, reveals that 46% of potential clients perceive a lack of clarity in the cost structure, making it difficult to ascertain what they are being charged by their advisors. This issue outweighs other concerns, with 28% of respondents deeming advisors too costly, and 20% finding it challenging to locate a trustworthy advisor.
The complexity of compensation models for advisors and their firms, encompassing a range of methods from asset under management (AUM) fees to commissions and combined structures, complicates clients' understanding of financial advice costs. This complexity is a significant deterrent for potential clients, particularly the multitude of Americans who ventured into investing amid the pandemic and are now seeking professional financial guidance with a preference for a less direct involvement in investment decisions.
John McKenna, a research analyst at Cerulli, emphasizes the importance of advisors being forthcoming about their fee structures and the delivery of their advice. As investors shift from independent trading to seeking professional financial advice, they prioritize advisors who can clearly articulate the nature of their services and the associated costs.
The diversity in fee structures among financial advisors includes those who charge based on AUM, those who earn commissions, and others who utilize a combination of both for ongoing advisory services. Additionally, wealth management firms may receive compensation through various other channels, including revenue sharing agreements.
The study also points out the practice of adjusting fees based on the client's AUM, highlighting that a client with $750,000 in investable assets typically incurs an average advisory fee of 1.04% of AUM, with the average fee not dropping below 1% until the client's investment with the advisor reaches at least $1.5 million.
