A Lack of Openness Between Advisers and Investors
A report from analytics firm Cerulli Associates revealed differences in how investors and financial advisers perceive their financial relationship. Investors either misunderstand or don’t understand how their advisers are being compensated. Advisers, on the other hand, often control a smaller portion of their client’s portfolio than they otherwise believe.
On the subject of compensation, Cerulli reported, “Overall, more than 60% of investor households believe they are receiving fair value from their advice providers, though nearly two-thirds of investors either believe the advice they receive is free, or do not understand how their providers are paid. In many cases, advisers and providers fear what the reactions of clients would be if they understood how an adviser was being paid, essentially doubting their own value. By embedding fees within portfolio management costs or deducting revenues from accounts, providers are able to avoid the perceived pain-point of having investors write discrete checks to pay for the services they receive. However, in reality, if the client does not understand what they are paying, they are more likely to assume it excessive.”
Advisers, conversely, either misconstrue or are in the dark about how much of their client’s assets they actually oversee. Again from Cerulli, “Overall, 74% of investors report owning a direct investing account in addition to their primary provider relationship; however, advisers believe that just 17% of their clients hold these accounts. This discrepancy clearly underscores the difference between reality and advisers’ perceptions of their relationship with clients. The goal of traditional advisers is to manage the entirety of their clients’ portfolios, but the majority of investors prefer to keep at least a portion of their assets a secret from their advisers.”
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