What is a reasonable rate to charge for services rendered? It used to be that financial advisors could charge a higher rate, given the resources behind them including the brand of the company they represent as well as their own brand [a.k.a. reputation in the market].
Perception of value is in flux in the financial advice ecosystem, as advisors juggle an increasingly digital, low-cost, and fee-transparent landscape [brought about by greater regulatory pressure to be transparent and the rise of robo-advisory services particularly those from Internet and/or Fintech startups.
Advisors and their firms are being asked to justify how they add value as investors become more discerning about their fees, according to Cerulli Associates. To remain competitive, advisors must evolve their definition of advice to include nonfinancial aspects of the client’s life and curate a meaningful experiential process for their clients.
The percentage of investors who believe that their advice is either free or are unsure of how they pay for advice has fallen from 65% in 2011 to 42% in 2018. Advisors also report heightened fee sensitivity from their clients. Close to three-quarters of advisors agree or strongly agree that, compared with five years ago, prospective clients are now more sensitive about fee levels.
“Despite growing fee awareness, willingness to pay for advice has increased,” says Marina Shtyrkov, research analyst at Cerulli. As of 2Q 2018, 53% of investors agree that they are willing to pay for advice regarding their financial investments, representing a 15-percentage-point increase from 2009 when only 38% of investors expressed such willingness. Overall, 76% of investors agree or strongly agree that the value they receive from financial advisors is worth the expense.
“While clients understand that advice comes at a cost and many believe it is worth its expense if the cost-benefit of engaging with an advisor is not clear, they are more likely to opt for other providers,” Shtyrkov adds.
According to the majority of retail investors, transparency (73%), understanding of needs and goals (67%), and promptness of requested follow-ups (66%) are paramount to advisory relationship satisfaction.
“Notably, according to satisfied investors, an advisor’s integrity and the overall relationship outweigh expertise or investment performance,” explains Shtyrkov.
“Although acumen and investment performance are valuable, practices that emphasize only these elements may be misaligned with the true drivers of investor satisfaction.”
Of all advisors surveyed, only 30% strongly agree that their practice goes above and beyond to make clients feel special and that it has a repeatable, consistent client experience.
“Experience-centric practices exhibit stronger results than their peers across a series of metrics, including a higher median client size, lower asset attrition, a broader service set, and greater likelihood to target affluent clients,” continues Shtyrkov.
“By outpacing their peers in these categories, experience-centric practices demonstrate that advisors can harness the power of their client experience to increase retention, reduce attrition, and generate a strong referral system.”
In Hong Kong, commission-based products are still commonplace, noted Tariq Dennison (photo left), a fee-only retirement plan specialist with GFM Asset Management in Hong Kong.
“Mutual fund investors can still get hit with a 3-5% sales commission and 1.0 - 1.5% annual fee, and few retail buyers question this. With investor education, it becomes clear that commissions cost far more in bad incentives than simply paying a fee for financial advice,” he added.
He noted a futuristic model of paying for financial advice, similar to Netflix subscriptions: “You can pay a flat monthly fee regardless of how many movies you watch, or how big your family is. This could happen just as easily with financial services that scale (e.g. access to funds), with add-on costs if and when you need a professional, human advisor,” explained Tariq.
Robo-advisory in Hong Kong has yet to reach levels similar to that of the US. Tariq pointed to a handful of players in the local market exists, though believed that greater uptake of robo-advisory will likely happen when the big banks market the service more aggressively.
In recent months, DBS in Singapore and Cathay United Bank in Taiwan have launched platforms developed by Fintech company, Quantifeed.
“These launches have the potential to transform the wealth management landscape for the mass affluent. Many of them have removed upfront transaction fees, creating highly cost-competitive wealth management services across the region and they open up the wealth management market to middle-class retail investors by lowering initial investment amounts,” said John Robson, chief commercial officer for Quantifeed.
Statista estimates that assets under management (AUM) in the robo-advisory segment for Hong Kong is about US$366 million in 2019, with average AUM per user at US$16,729. It forecasts this figure to grow to US$5,192 million by 2023, growing at 94% CAGR over the forecast period of 2019-2023, with as many as 260,000 users by 2023.
Sneha Kapoor, research manager at IDC Financial Insights for Asia-Pacific says traditional players with hybrid advice model are more likely to dominate the market in terms of assets under management (AUM) in Asia/Pacific.
“The few robo-fintechs that survive will follow the model of their peers in the United States, evolving to operate as hybrid or wholly automated full-stack platforms with better financial planning services,” she added.
A recent study done by IDC Financial Insights on robo-advisory in the Asia/Pacific region looked at over 70 robo-advisors in the region in November 2017 noted that 10% of surveyed companies closed shop six months later.