Is Digital Advice Really the Future?
Investors are more willing to pay for financial advice, challenging the fear that low-cost digital and robo advice platforms will run traditional advisory firms out of business, a Cerulli Associates report indicates.
In the third quarter of 2016, 50 percent of investors said they were interested in paying for financial advice, compared to the 40 percent of investors eight years ago.
Investors are more open to paying for financial advice, but the market has not met their preferences or expectations, Cerulli Director Scott Smith said in a press release.
“The rise of digital advice shows that investors are frustrated by the current state of financial advice,” he added.
One potential issue is fee mismatching.
Generally, the more a client depends on an advisor, the more they will prefer a fee-based structure over commission-based payment schedule. For example, while 64 percent of self-directed investors say they prefer to pay commissions, only 21 percent of advisor-directed investors say the same.
This leaves many clients caught in an industry whirlpool of advisors moving to fee-based compensation structures amid a changing regulatory environment, and those resisting the change in order to preserve client choice. The undercurrent of the latter group has the potential to really annoy clients.
“While critics of the industry’s move toward fee-based offerings bemoan the potential for limiting choice for investors from this perspective, it actually appears that clinging to commission-based models may result in mismatches with the preferences of a majority of advisor-reliant clients,” the report states.
Another issue, which will be addressed by the Department of Labor’s Fiduciary Rule, is that 67 percent of investors feel their advisor must always act in the client’s best interest. Meanwhile, most client relationships are not currently bound to a fiduciary standard, says the report.
“Digital options have become part of the landscape, but consumers facing complex decision processes repeatedly choose to include humans in their service selections," said Smith. "A belief in the trustworthiness and expertise of providers is a crucial element of these relationships."
To better serve clients, advisors need to adapt to investors’ “preference for fee-based fiduciary relationships if they want to be considered at all," the report states.