Financial Advisor Compensation Now Overwhelmingly Comes From Fees

Yet the median financial advisory firm last year saw assets grow only between 2% and 3%, excluding market appreciation, says Envestnet.

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Financial advisors currently receive an average of 71.1% of their compensation from asset-based fees, which they expect to increase to 76.7% by 2025, largely at the expense of commissions, said Blake Wood, Envestnet’s head of platform strategy.

Rethinking65 recently interviewed Wood about the findings of Envestnet’s 2024 Advisor Perspectives Survey, which was conducted earlier this year and included 290 financial advisors. The respondents had above-average team AUM and included 62% fee-only RIAs. Envestnet, with more than $6 trillion in platform assets, provides wealth management technology and services for advisors and investors.

But it is not just independent RIAs who increasingly are relying on fees. The survey found advisors affiliated with brokerage firms anticipate increasing their fee-based asset mix by 11 percentage points over the next five years, underscoring a growing preference for more transparent advisor compensation models.

Wood noted more than half (54%) of financial advisors expect at least 90% of their revenue to come from advisory fees by 2025. “Investors who are younger than 30 are least likely to pay commissions, with only 7% reporting a commission-only fee structure,’’ he said.

Why Are Fee-Based Models Becoming More Popular for Financial Advisors?

Why has the industry been shifting from commission-based income models to fee-based models? In large part, because consumers prefer a fee-based structure, Wood said.

He cited a recent finding from Cerulli Associates, the analytics and research firm, that says commission-based revenues and advisor compensation are decreasing from these sources.

“Advisors will continue to see a decline over the next few years. While fee-based is the preferred pricing model for clients, advisors also must offer alternative fee structure options to grow their business. Alternative fee structures may be appealing to younger clients who can eventually graduate into an asset-based structure as the relationship grows or to investors who are looking for one-off help,’ Wood said.

Organic Growth for Financial Advisors Is Lackluster

A change in thinking and approach would help resolve the survey’s finding that 71% of responding advisors place a premium on organic growth, yet the median firm saw only 2% to 3% in growth in assets.

“Advisors need to change their message, to support families they currently have and who depend on their services, but also acquire new clients who aren’t going to be attracted by AUM. They need to change the message to ‘What do you want to get out of life, what are your concerns, here are the things that we have to support you.’ We have seen advisors embracing this, moving away from selling and talking about portfolios and to talking more about life planning.’’

Short-Staffed Financial Advisor Firms

Survey respondents said they did not have enough advisors to service existing clients and to prospect for new clients. Is there a solution to this dilemma?

“We have seen advisors leveraging third-party platforms for referral sources (like custodian referral programs). We have also seen firms have dedicated business development teams that are working at the top of funnel, qualifying leads then handing overqualified prospects to the advisory teams,’’ he said.

Building a Better Financial Advisory Firm — A Holistic One

Another path to success, Wood said, is the trend for U.S. financial advisory firms to offer enhanced services including tax, accounting, trust and legal services, rather than, as Wood put it, “just hoping they have a good relationship with a couple of COIs’’ to service these needs.

An organic growth firm is more attractive to younger advisors, which leads to retention of emerging, valued employees, which lends itself to a more comfortable firm culture, Wood said.

“You’re trying to bring in the next generation of talent — they may be junior advisors or on the operations staff — but what if the firm is not growing? You’re training employees who will leave to go to a growing firm. You want to have an internal firm culture that will appeal to younger talent who will stay beyond the principals’ tenure.’’

Envestnet’s survey found that 47% of wealth partners prefer holistic servicing from their advisors, up from 29% in 2018.

“I think that’s because expectations are being changed by service outside traditional financial advice, from technology. There are all these apps that help you and it can be really easy. And there are the influencers who are talking about these things,” he said.

“The traditional uninformed kind of buyers are becoming informed by tools and technology that come directly to consumers. They can help with credit, healthcare, tax and accounting in one place, rather than having a separate lawyer and accountant.’’

The challenge for advisors, Wood said, is to go beyond talk of benchmarks and asset-class-return performance.

“It’s like going to the dentist; no one looks forward to that! Some of our nerdy people like that but to the vast majority, that is not what’s important; their thinking is ‘I assume you have my money taken care of.’”

Woods said advisors need to talk about other concerns beyond investing. “Advisors don’t always create space for that. Clients want to know about life insurance, and do they have a will and an estate plan in place so they can do the fun things in life?”

When Outsourcing Is Needed for Financial Advisors

Outsourcing was on the minds of survey respondents, for compliance needs as well as management. Twenty-one percent of respondents don’t have access to in-house compliance specialists, in particular, smaller firms with under $500 million AUM.

“Certainly, outsourced providers are a great solution for many smaller firms. Additionally, firms can also craft their offerings and use platforms that have embedded controls and compliance features. While this doesn’t reduce the reporting burden, it can reduce the effort and risk to the firm by having strong controls on process and easy to access reporting for the regulators,’’ Wood said.

Based on the survey, what did Wood see as the future of outsourcing investment management, which 61% of survey respondent advisors said they were comfortable with.

“We see rising demand for financial advice, and increasingly consumers want to engage with BOTH digital tools and with a human advisor,’’ Wood said. “We believe there will be continued growth in outsourced investment management services. Outsourced management tools will enable clients to have some self-service components to the process, decreasing the time spent by the advisory firm’s staff. But we don’t see this as all or none.”

In fact, a hybrid approach is likely — one where the advisor and/or client may want to control certain portions of the overall portfolio and the rest is outsourced, he said. “We expect to see outsourced management investment solutions go down market to attract the mass affluent clients and grow AUM.”

Yet many advisors today view their investment strategies as proprietary to their brand identity and the value they provide to their clients. “However, we are seeing more and more advisors willing to save their proprietary investment strategies for their wealthier HNW clients and attract the younger, mass affluent clients in an outsourced investment portfolio to win their business and charge them for other services to help them plan and accumulate wealth,’’ Wood said.

Next-Gen Financial Advisor Services

The survey also revealed that serving the next generations continues to be a source of anxiety for financial advisors. Wood sees several important trends in the next-gen drama.

“Advisors are beginning to offer new suites of services that may include savings goals, debt management, cash management solutions, subscription-based fee models, and outsourced investments. In the U.S., 62% of investors want to consolidate their financial activities with a single provider,’’ Wood said.

Options to attract next generations include: professional/modern websites, SEO, budgeting blogs and resources, financial literacy on social media, debt management resources (student loans). “Younger clients want to work with advisors who are going to engage with them frequently,’’ Wood said.

He said data says that the great transition of wealth is beginning. “This is putting a lot of pressure on advisors who have not yet begun to prepare to interact with millennials and GenZ client segments. Advisors must find creative solutions to modernize their practices and engage with clients’ children or they will look elsewhere,’’ he added.

Wood pointed to some insight into the next generation:

  • 56% of Millennials and GenZ first go to social media for a financial advisor and are not tapping into traditional channels of subject matter experts. This generation is burdened with different circumstances than previous generations and is more in tune with finding solutions for financial wellness.
  • Prospective clients under the age of 45 currently are feeling underserved by advisors. There is a lot of opportunity here for advisors to have different types of conversations.

Succession Planning for Financial Advisors

Wood noted that 80% of financial advisors still do not have a continuity plan in place, while the average age of financial advisors is trending up to 63 years old.

Over the next 10 years, 110,000 advisors are going to transition to retirement. The needs of next-gen advisors are evolving as well, and firms’ management structures are changing to adapt to the next generation of advisors who are expected to take on and service the needs of more clients — further emphasizing the need for consolidated and integrated tech stacks.

Wood said that he was most surprised by the survey’s revelation about how much time firms are spending on operations: billing, account opening, trading, reporting.

“These are all things that have been by and large automated for quite some time. If I am a principal or owner of a firm, and I want to increase the firm’s value, the first thing I think about is how I am spending my time and how can I serve my clients better.,” he said. “Sometimes the hardest conversations we have are with RIA firms about automation; they think about how it is going to cost more, and that might mean repurposing an employee or even letting go of a valued employee. It’s really hard.’’

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