Evolve Ahead to Meet Client Expectations, Price Flexibility, and Investor Trends

In 2023 alone, the Morningstar US Market index returned 24%. And that was on the back of an amazing run for risk assets in the past decade. But these tailwinds aren’t projected to last. Morningstar’s capital markets team puts the three-year range below or well below historical norms.

While US stocks have generated 12% annualized returns over the last 10 years, Morningstar’s investment team expects that will drop to 5.4% over the next 10 years.

When returns decrease, advisor fees will have a more pronounced effect on client outcomes, drawing increased scrutiny. Investors may increasingly turn to financial advisors with questions about portfolio adjustments, financial planning, and whether they’ll be able to meet their goals.

Savvy advisors and home offices at advisory firms should ask: is it obvious to clients that my services are worth what I charge?

Morningstar’s 2024 Voice of the Investor research program helps answer this question (among others) by generating a multi-faceted view of investor trends through multiple studies and surveys.

For the main Voice of the Investor survey, 4,645 responses were collected across the United States, United Kingdom and Australia among investors and non-investors. The overall sample in each country was nationally representative.

In addition, to get specific insights around advisor fees, we surveyed 506 investors who currently work with a financial advisor. These respondents were required to have a minimum of $100,000 in investable assets, with 399 (79%) of respondents having $250,000 or more. (We will refer to this sub-study as the “Advisor Fee Survey.”)

Within this program of research, we found that:

• Inheriting generations are positioned to disrupt the traditional advisory fee structure.
• Distinct investor segments have emerged – and they require tailored approaches.
• Advisors who adopt software solutions that help them visualize their high-value offerings at scale have an opportunity to win.

According to the Advisor Fee Survey, over half (54%) of investors don’t know how much they’re paying their advisor – but that might soon change. Inheriting generations are positioned to disrupt the traditional advisory fee structure.

While 30% of Baby Boomers thought that their advisor’s fee transparency did not need to be improved, only 11% of GenZ/Millennials thought the same.

We also found that although charging a fee based on AUM has been traditional for advisors and wealth managers, an evolution of that model may be upcoming. While the most common way GenX and Baby Boomers currently compensate their advisors is based on AUM, as generations get younger, that changes to fixed fees.

And even GenX and Baby Boomers would rather compensate advisors based on performance, defined in our study as “a percentage of the investment gains or an amount paid for achieving specific financial targets,” rather than AUM. This is unsurprising in a landscape where “pay-per-use" internet and Netflix have become the norm –investors across the board are both used to a variety of payment models and have come to expect them.

While investors of all ages prefer an auto-pay fee system, that percentage also drops along generational lines – with 71% of Baby Boomers preferring having their advisory fees automatically deducted from their investment account, and only 49% of GenZ/Millennials agreeing.

Not only are Gen Z/Millennials more conscientious about their advisory fees, but 38% of Gen Z/Millennials and 21% of GenX investors would be likely to switch away from their current advisors for a more transparent/lower fee structure with either another advisor, robo-advisor, or brokerage platform – one that comprised of the costs being clearly disclosed and easy to understand, with no hidden fees or complex pricing.

All this points to an incoming generation of investors who may have questions about what they’re paying advisors, how they’re paying it, and whether there are better options out there. Prudent advisors cannot assume the stickiness of their relationships without ensuring that their clients clearly understand the value they provide.

The good news is our research shows that investors are willing to pay for value when they see it, including for advice on assets that aren’t currently being managed by their advisors. This is especially true for GenZ and Millennials.

In preparation for potential disruptions to fee practices, advisors and home offices can refine their approach by highlighting their high-value client deliverables such as portfolio performance, tax liabilities, and investment opportunities.

Our research also found opportunities in the following areas which investors highlighted as high-value to them:

• How advisors are tailoring advice to client risk profiles
• How portfolios will perform in different market scenarios
• New investment opportunities that will help clients meet their goals

Advisors can also win business by tailoring their approaches to evolving investor preferences. The Voice of the Investor survey uncovered the following clear segments within the totality of investors:

• 40% of investors are more diversified with an average of 10%+ of their investable assets spread across each of five different types of accounts
• 29% of investors have strong concentration in employer retirement accounts with 75% of their investable assets there
• 17% of investors are focused on savings in bank or credit union accounts with 78% of their investable assets there
• 14% of investors have strong concentration with 61% of their investable assets in brokerage accounts

These segments show several different investment strategies of investors.

The chart below brings together all these segments, showing how all investors as a group distribute their investments. This helps to show how individual choices fit into the bigger picture.

We investigated these segments further, asking them:

• Do you work with a financial advisor?
• How satisfied are you with your approach to investing?
• In which areas does a financial advisor provide value to you?
• What are your financial goals over the next 3 years?

The results are below:

Advisors and home offices who understand these distinct investor segments can adopt the tailored approaches necessary to effectively serve them.

For example, in the Savings/Bank-Focused segment, only a third of these investors work with financial advisors – and they also are the least satisfied with their approach. Advisors have an opportunity to win clients in this group, but what should their approach be?

Unlike the other groups, who value advisors who “make them feel secure about their financial future,” the Savings/Bank-Focused segment values understanding financial concepts and investment options. Advisors who position themselves as educators – and are able to follow-through at scale – may stand out from their competition.

Another insight is that investors across multiple segments prioritize paying down debt, suggesting that advisors who incorporate a debt reduction strategy into their client’s investment approach may find it a winning strategy. (Interestingly, in a separate qualitative study with advisors this year, we found that eight out of 15 ranked debt management as the least impactful way they thought they could add value.)

Keep up with Morningstar’s Voice of the Investor and Voice of the Advisor research to stay connected to evolving investor preferences.

The combination of potential advisory fee disruptors and the distinct segmentation of investors provides a unique opportunity for advisors (and home offices) who are willing to take an unflinching look at their toolkits.

Advisors could benefit greatly by stressing the importance of managing an appropriate risk/return profile. They could also benefit from showcasing advanced risk modeling capabilities to draw direct links to returns needed for their clients to obtain their desired goals.

To that end, those who adopt software solutions that help them visualize these high-value offerings at scale have an opportunity to win.

In our Advisor Fee Survey, we offered the following images from Advisor Workstation (without revealing the product name) and asked investors:

• How helpful are these for evaluating a proposed investment plan?
• How confident would you be about acting on investment recommendations from a financial advisor who used these visualizations?

The results suggest that the right software support can elevate an advisor’s perceived helpfulness and provide investors with the sense of emotional safety that they crave when making financial decisions.

It’s long been assumed that advisors and wealth managers should expect disruption. First it was from financial magazines and media, which combined with lower fee trading of mutual funds, stocks, and bonds to birth a new generation of investors.

Then it was target-date funds, which today account for a large swath of retirement assets. And more recently, it’s been an increasing demand for personalization fueled by emerging technologies and the artificial intelligence boom.

Regardless of what the disruption is, advisors and wealth managers can adapt and use them to enhance their toolkit. And while things continue to change, Morningstar’s mission and role as an ally in achieving investor success has not.

We provide the latest trends and solutions built on market and investor evolution, giving advisors and wealth managers the insights and tools they need to continue to succeed.