Affluent investors are satisfied clients, but also open to pitches

The share of affluent investors who say they're open to paying a fee for financial advice has jumped over the past 15 years, but a big chunk of those clients could still be up for grabs.

That's according to a study released earlier this month by research and consulting firm Cerulli Associates, which found that 68% of investors with at least $100,000 in household assets said they would be willing to pay for financial advice in 2025 — compared to just 38% in 2010. 

Fee compression, technology lifting barriers to access and the "proliferation" of advice delivered under the fiduciary duty drove that 30-point spike, the study said. A strong 98% of investors with all levels of assets described themselves as "satisfied" with their advice providers. However, over one-third of them, 34%, included the caveat that they're "open to considering other options."

The "negligible" number of clients who leave financial advisors and their wealth management firms in the wake of a change in the fees suggest that they wouldn't play much of a factor with any losses, though, according to Cerulli. That's why the findings pointed to the need for advisors to focus on "the basics" of meeting clients' needs, without assuming that they're doing so or neglecting the "huge opportunity" for prospective customers, according to Mike Byrnes, the founder of advisory practice growth strategy firm Byrnes Consulting. While some dissatisfaction tied to wild stock volatility may be completely out of their control, advisors "really should do survey work and research" regularly to know for sure whether their clients are happy, he said.

"You should invest a lot in servicing them and have a really well thought out service model," Byrnes said. "You've got a third of your book of business that could be at risk if something happens."

READ MORE: Investors want 'peace of mind' from financial advisors. But what is that? 

Reading between the numbers

That mix of potential challenges with new business possibilities stood out from the report, which was the latest homing in on how advisors provide value and charge clients for their services. On the one hand, the upswing in affluent investors who said they either "strongly" or "somewhat" agreed with the statement that, "I am willing to pay for financial advice," presented some leads. While only 33% of the investors with less than $100,000 in assets put themselves in that camp, 59% of those with between $100,000 to $250,000 strongly or somewhat agreed, as well as 53% of those with $250,000 to $500,000, 60% with $500,000 to $1 million, 62% with $1 million to $2 million, 64% with $2 million to $5 million and 75% with $5 million or more.

"As an individual's wealth grows, taxes become more burdensome, financial and estate planning becomes more complicated, and additional investment products (e.g., separately managed accounts, alternatives) become more accessible," Michael Manning, a research analyst in Cerulli's wealth management practice, said in a statement. "Investors encountering these challenges for the first time naturally need assistance navigating the numerous complex variables linked to asset growth. The value of financial advice now extends beyond higher market returns."  

And that includes clients at any level of wealth. Citing Morgan Stanley's in-house "pipeline of brokerage clients that eventually can be converted into advised clients" through its ownership of self-directed online investment firm E-Trade as an example, though, the Cerulli report said that the low willingness to pay an advice fee among those with fewer investable assets do not mean wealth management firms should avoid them. In fact, the research suggested the industry must court those investors.

"Financial providers must not ignore investors in lower-wealth tiers and must seize the opportunity to create meaningful, lasting relationships," the report said. "Creating an easy path to convert a brokerage client into an advised client is crucial, as is attracting clients early in their careers or financial journeys, before other providers find them."

READ MORE: Best advisor pay for the $1M producer 

Not 'splitting hairs' over fees

On the other hand, even if firms do identify these possible clients, they will still need to demonstrate their value to retain them for the longer term. At least 40% of the clients with $5 million in household assets or more said they're satisfied but willing to consider other firms, as well as 27% of those with between $2 million and $5 million, 29% with between $1 million and $2 million, 35% with between $500,000 and $1 million, 34% with between $250,000 and $500,000, 45% with between $100,000 and $250,000 and 37% with less than $100,000.

And fees may matter less to those clients than some advisors think, according to Cerulli. Instead, the clients' view that another firm "better suits their needs" or that they had "a bad experience at their current firm" likely would loom much larger in their decision, the report said.

"Wealth management firms and advisors often carefully consider and reevaluate how to price their advice fees," it stated. "While this is an important and worthwhile exercise, Cerulli has found through qualitative interviews with wealth executives and financial advisors who had undergone a recent fee change, [that] clients hardly notice the change. For those aware of it, the number of clients who chose to leave that advice relationship was negligible. Generally speaking, clients will remain in their advice relationship as long as they see value in the service being provided, and they rarely are concerned enough to split hairs over pricing."

Some advisors have already caught onto the nuances of that concept.

"You've got to have a value proposition," one advisor at an independent brokerage told Cerulli. "If they're going to pay you a fee, then you must bring something to the table. And a lot of advisors' worth that they bring to the table is to keep the client from doing something stupid."

READ MORE: The first meeting with a client is critical. Here's how to get buy-in 

AUM fee is the No. 1 preference

In that sense, the survey may refute some advisors' assumptions about the level of importance that prospective clients assign to the type or amount of fees that they pay. 

When asked their preferences, investors chose the traditional fee of 1% of assets under management, self-directed services that charge nothing for advice and even commission-based transactions over retainer fees or hourly rates. The AUM fee came in first place for every segment at $100,000 in assets or above and in the No. 2 position below self-directed investing for those with less than $100,000. And commissions were the second most popular among investors with more than $5 million in assets and those with between $100,000 to $250,000. 

Overall, the AUM fee was the preference for 36% of the investors, self-directed services appealed to 25%, commissions were the top choice for 23%, retainer fees were No. 1 with 13% of investors and hourly rates attracted just 2% of the group.

While self-directed tools do command a substantial share of the wealth management marketplace, investors' growing willingness to pay for advice also displayed that new technologies from robo advice to artificial intelligence have yet to compress the industry's fees, Byrnes said. And the mostly healthy bull returns over roughly the past 15 years have helped make the AUM fee at a fiduciary registered investment advisory firm very attractive to clients.

"If advisors are doing the right job and the markets are successful and everything keeps going up, then people don't mind paying it," Byrnes said. "If people have to cut a check and manually pay, those relationships probably are not as sticky."