High Net Worth Investors Prefer Fees to Commissions

High net worth investors prefer paying fees vs. commissions to their financial advisors, but industry data indicates that increasing numbers of financial professionals are switching to a compensation method charging both fees and commissions.

Sixty percent of financial advisors charge both “fees and commissions,” compared to 17 percent who receive “fee only” compensation, according to the 2011 Survey of Trends in the Financial Planning Industry, recently published by the College for Financial Planning. The college, which confers the Certified Financial Planner designation and several other professional certifications for advisors, notes a “steady shift” away from fee-only compensation.

The share of advisors who report their method of earnings as both fee- and commission-based has grown from 43 percent in 2008, while the share charging fees only has decreased from 30 percent in 2008. The percentage of advisors charging commissions only has declined slightly from 11 percent in 2008 to 7 percent in 2011. 

At the same time, high net worth investors, who have investable assets of $5 million to $25 million, would rather pay their advisors fees than commissions, according to Millionaire Corner research on the attitudes and behaviors of affluent Americans. While two-thirds of the high net worth investors say they are “very comfortable” with the compensation they pay to their advisor, the same percentage said they would prefer to pay fees for financial or investment advice rather than “having the cost of the advice built into product sales commissions.”

Among high net worth investors who prefer fees to commissions, most would prefer to pay a service-based fee, rather than a fee based on a percentage of assets under management. The majority of high net worth investors seem to feel their advisors charge reasonable fees, but 64 percent of younger investors – those age 54 and under – say they find the services of a financial advisor to be “very expensive.”

Fees for preparing a comprehensive financial plan for a client range from zero to $5,000 or more. The most commonly charged fees for a comprehensive plan ranged from $1,000 to up to $2,000, followed by $2,000 to $3,000. Clients were also likely to request single-focus plans for investments, college education funding and taxes. Less frequent requests were made for estate and insurance planning, and elder care needs.

Financial professionals report that their clients were fairly knowledgeable about basic budgeting concepts and setting financial goals, but were lacking in knowledge about estate planning, tax planning and insurance issues.

While high net worth investors weigh fees and commissions when choosing an advisor, the place more importance  on whether the individual seems trustworthy, provides transparency, has a good investment track record and offers a depth of products and services.