FA Playbook

Young investors are willing to pay for financial advice: Study


Even amid today's strong markets, investors are happy to pay for expert advice on their investments.

Those were the findings from a recent study performed between January and September 2016 by Cerulli Associates, a Boston-based research and consulting firm.

Half of the approximately 5,500 participants agreed with the statement, "I am willing to pay for advice regarding my financial investments."

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That's up sharply from 2009 — the same year the hit its nadir — when 38 percent of investors said they would shell out for advice.

The increase in investors' willingness to pay for advisors' expertise comes at a time when robo-advisors have made investment advice available via algorithms for as low as 15 to 35 basis points.

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In comparison, a human financial advisor can charge as much as 100 basis points — or 1 percent of assets under management.

The value proposition for financial advisors has changed in the last eight years, with a growing emphasis on a diversified approach to investing and providing holistic advice, according to Scott Smith, director at Cerulli.

"In the 2008 and 2009 crisis, people felt they got burned and advisors didn't help them avoid that," he said. "The industry didn't frame itself as 'We're not market timers; we're advice providers.'"

Growing pains

The investors who are most eager to pay for financial advice aren't the baby boomers who are already in retirement with a pool of savings.

Rather, it's the under-40 crowd that's most in need of help. Professional advice is scarce because so much of their wealth is tied up in their savings, and they have little in the way of investible assets.

"At that point, your financial relationships are with your 401(k) provider and the bank where you keep your checking account," Smith said.

Fully, 79 percent of households aged 30 to 39 either agreed or strongly agreed with the statement, "I am willing to pay for advice."

Additionally, 73 percent of households under age 30 felt the same way.

"You're making the most important decisions under age 40: You get married, you have your kids, you buy your first house," Smith said.

Changing models

In order to build a relationship with clients under 40, financial advisors will need to rethink their compensation models.

Instead of charging a commission, advisors may want to consider a fee schedule that wraps up the investment advice and the more comprehensive financial planning these younger clients need.

"There's this assumption that investors really prefer commissions and that if advisors move toward fee-based, there will be resistance in the client base," said Smith.

In reality, one in five investors who rely fully on their advisor's guidance preferred to pay them on a commission basis, according to Cerulli.

Meanwhile, 79 percent said they preferred a compensation model that charged a percentage of assets, a set retainer fee or an hourly fee.

"There is a place for custom advice beyond investment management fees," said Smith. "People aren't resistant to fees for advice; there is more to the relationship."