Investors prefer commissions to account fee: Study
Investors would rather pay commissions for the financial advice they receive than a fee based on assets under management, said Cerulli Associates.
About 47 per cent of the 7,800 households surveyed prefer paying commissions, compared to the 27 per cent that would rather contribute a fee based on assets, according to the report released on Wednesday by the Boston-based research firm. About 18 per cent said they preferred paying retainer fee, which is generally lumpsums negotiated between advisers and clients. Eight per cent said they opted for an hourly fee structure.
“Investors don’t like the idea of paying a fee forever,” said Scott Smith, associate director for Cerulli. “I think it rubs them the wrong way until the benefits are explained.”
The financial advice industry had been moving towards a fee-based model in recent years, the report said. In 2010, about 66 per cent of all providers of financial advice were compensated only, or primarily, by fee compared to 46 per cent in 2003.
“If you’re only going to trade five or seven times a year, it’s probably more economical for you to pay a commission, as opposed to paying someone one per cent of your assets as management fee,” said Ira Hammerman, general counsel for the Securities Industry and Financial Markets Association, the lobbying group for the brokerage industry.
FREE ADVICE
About 33 per cent of investors surveyed said they didn’t know how they paid for the investment advice they received, and 31 per cent said they thought their adviser or broker provided investment advice for free.
Those who were unsure of how they pay for advice were most likely to be unhappy with their financial adviser, with 47 per cent reporting dissatisfaction, the study said. About 27 per cent of those who said they paid commissions reported being dissatisfied.
“Somebody who hands their adviser a cheque and hopes for the best is unlikely to have been very happy in the last few years,” Smith said.
About 64 per cent of those surveyed said they believed their financial adviser was held to a fiduciary standard of care, and 63 per cent of the clients of the largest broker-dealers said they thought that as well.
Currently, brokers must meet a standard to offer cli ents “suitable investments,” whereas registered investment advisers have a fiduciary obligation to put clients’ best interests first.
COMMON STANDARD
In January, the US Securities and Exchange Commission released a report recommending a common fiduciary standard for brokers and registered investment advisers who provide personalized investment advice. The SEC is scheduled to propose a rule on the standard between August and the end of the year, according to its website.
Holding brokers to a fiduciary standard won’t preclude them from accepting commissions, the SEC report said.
“Our clients have consistently indicated they want choice in how they purchase and pay for wealth management services,” said Christine Pollak, a spokeswoman for Morgan Stanley Smith Barney, the world’s largest brokerage.
Investors who say they prefer commissions may not realize how much they’re paying in terms of dollars, said Ellen Turf, chief executive officer of the National Association of Personal Financial Advisors, a network of fee-only financial planners.
“I think it’s a psychological thing,” she said. “I think the average consumer really doesn’t understand.”
The Cerulli study was based on a Phoenix Marketing International survey conducted between August and December 2010. The study focused on households with more than $50,000 in annual income or more than $250,000 in investable assets.