Cerulli Identifies "Advice Opportunity Households" For US Financial Providers

Eliane Chavagnon

9 December 2013

Around a quarter of US households occupied by individuals aged 50-59 are an “advice opportunity,” defined in a new report as those that recognize their need for more financial and investment advice, and who are willing to pay for it.

It should be noted, however, that at least 16 per cent of individuals in each younger age cohort also expressed the view that, essentially, costs are part of the relationship with financial providers. Interestingly, those aged 39 and under with less than $100,000 of investable assets are more likely to recognize this than many of their wealthier peers.

“While these investors fall out of the target market of many providers, new firms are emerging to assist these households,” Cerulli Associates said in its US Retail Investor Advice Relationships 2013: Sorting Out the Winners and Losers report.

LearnVest, for example, offers planning relationships with certified financial planners for an upfront expense of less than $300 and then a $19 monthly fee, the firm noted. “Addressing these non-traditional models will require providers to significantly rethink their service delivery models, but could potentially be rewarded over the long term as these investors mature into more appealing wealth management clients.”

The remarks come at a time when there remains debate in the wealth management industry as to what is the “sweet spot” in terms of the most profitable client segment, particularly as it is sometimes claimed that ultra-wealthy clients can be an expensive customer base to serve.

Areas for improvement

Cerulli's report analyzed the relationship between financial providers and retail investors, looking at the process of client acquisition as well as advice delivery, investment management, pricing and client retention strategies.

“While investors sometimes overestimate their willingness to pay for advice, there is clearly demand among these investors for a more formal approach to ongoing advice,” said Scott Smith, a director at Cerulli Associates. “Providers should be encouraged that interest in paid financial advice is increasing, but they still must contend with clarifying the benefit of their services to prospects.”

Cerulli believes that advisors must be more “straightforward” as regards how and why each product fits within a client’s portfolio. Investors have maintained or expanded the number of relationships they have with financial providers in recent years, suggesting that they're growing increasingly aware of the potential risks of holding all their eggs in one basket.

For example, the average number of financial providers per US household in 2008 was 2.9, rising to 3.1 in 2009, 2.7 in both 2010 and 2011, and rising again to 3 and 3.9 in 2012 and 2013 respectively. This trend was more pronounced among investors with between $500,000 and $2 million in investable assets, with the average number of financial providers per US household increasing from 3.3 in 2008 to 4.2 in 2013 among this investor segment.

“Despite our notion that the number of relationships would contract in the subsequent years, as market volatility and the economy stabilized, the downturn has obviously changed investor perception of diversification, not only in terms of product mix and allocation, but also diversifying the firms that hold their assets,” Cerulli said.

Yet, over 60 per cent of investors do not understand the compensation structures at their providers, the firm noted. While this can be attributed to a lack of “attentiveness” among investors, financial services firms must acknowledge their role in the matter.

“Even when firms choose to disclose their fee and commission structures during the initial onboarding process, it quickly becomes an afterthought, not often brought up for discussion again until it becomes too late,” Cerulli said. “With only a 62 per cent satisfaction rate with their providers, the data clearly supports the notion that investors who are not sure what they are paying grow to become the least satisfied clients.”