||Investors Would Rather Pay Commissions Than Fees
Investors would rather pay commissions for the financial advice they receive than a fee based on assets under management, a new survey has found.
About 47% of 7,800 households surveyed prefer paying commissions, compared with 27% that would rather contribute a fee based on assets, according to a report released this week by Cerulli Associates, a Boston-based research firm. About 18% said they prefer paying retainer fees, which are generally lump sums negotiated between advisers and clients, and 8% said they opt for an hourly fee structure.
"Investors don't like the idea of paying a fee forever," says Scott Smith, associate director at Cerulli. "I think it rubs them the wrong way until the benefits are explained."
The financial advice industry has been moving toward a fee-based model in recent years, the report said. In 2010 about 66% of all providers of financial advice were compensated only or primarily by fees, compared with 46% 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 1% of your assets as a management fee," says Ira Hammerman, general counsel for the Securities Industry and Financial Markets Association, the lobbying group for the brokerage industry.
Other survey findings:
"Somebody who hands their adviser a check and hopes for the best is unlikely to have been very happy in the last few years," Smith says.
- 33% said they didn't know how they pay for the investment advice they receive.
- 31% said they thought their adviser or broker provided investment advice for free.
- 47% of those who were unsure of how they pay for advice were unhappy with their financial adviser.
- 27% of those who said they pay commissions reported being dissatisfied.
About 64% said they believe their financial adviser is held to a fiduciary standard of care, and 63% of the clients of the largest broker-dealers said they thought that as well. Brokers currently must meet a standard to offer clients "suitable investments," whereas registered investment advisers have a fiduciary obligation to put clients' best interests first.
In January, the 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 that 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, says Ellen Turf, CEO of the National Association of Personal Financial Advisors, a network of fee-only financial planners.
"It's a psychological thing," she says. "The average consumer really doesn't understand."
The Cerulli study was based on a Phoenix Marketing International survey conducted between August and December 2010 that focused on households with more than $50,000 in annual income or more than $250,000 in investable assets.
(Source: Bloomberg News, 06/10/11)
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