Cerulli’s Andrew Blake: What Advisors Need to Succeed in a Competitive Market

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Our guest on the podcast today is Andrew Blake. Andrew is associate director of wealth management for Cerulli Associates. He is a member of Cerulli’s wealth management practice, leading coverage of asset manager distribution strategy for products sold through financial advisors. With a focus on the wealth-management landscape, Andrew assesses trends related to advisor use of investment products as well as their relationships with clients and varying practice types. Prior to joining Cerulli, Andrew worked at John Hancock Investment Management and a Boston-area RIA. He has a BBA in marketing as well as management and strategic leadership from Ohio University.

Background

Bio

The Cerulli Report: US Intermediary Distribution 2023

The Cerulli Report: US Advisor Metrics 2023

Research

US Broker/Dealer Marketplace 2023

US RIA Marketplace 2023

US High-Net-Worth and Ultra-High-Net-Worth Markets 2023

US Retirement Markets 2023

State of US Wealth Management Technology 2024

Advisors

The Cerulli Edge: US Advisor

“More Advisors Are Making the Move to RIA, Independent Models,” by Josh Welsh, investmentnews.com, Oct. 31, 2023.

“The Role of the Retail-Direct Channel in a Growing Financial Planning Profession,” cfp.net, March 28, 2023.

“Financial Adviser Shortage Looms, Cerulli Reports,” by Natalie Lin, planadviser.com, Jan. 16, 2024.

“Asset Managers Embrace a Technology Arms Race,” cerulli.com, Oct. 27, 2022.

“As Retirement Exodus Looms, Rookie Advisor Failure Rate at 72%, Study Finds,” by Ayo Mseka, insurancenewsnet.com, Feb. 12, 2024.

Other

Creative Planning

“Peter Mallouk: The Financial Advice Industry Is ‘Still Very Messy,’” The Long View podcast, Morningstar.com, March 26, 2024.

Vanguard Personal Advisor Select

Schwab Intelligent Portfolios

iCapital

Case IQ

Transcript

Amy Arnott: Hi, and welcome to The Long View. I’m Amy Arnott, portfolio strategist for Morningstar.

Christine Benz: And I’m Christine Benz, director of personal finance and retirement planning at Morningstar.

Andrew, welcome to The Long View.

Andrew Blake: Thanks for having me. I appreciate it. Really excited to dive into some of the topics we have weighed out for us today.

Arnott: Well, thanks so much for taking the time to talk with us. Before we get started, can you tell us a little bit about your role at Cerulli and the research areas you focus on?

Blake: So Cerulli is a research and consulting firm with four primary research practices: wealth management, product development, institutional, and retirement. I sit on our wealth-management team and act as lead author for two Cerulli reports that are very closely intertwined. One is our US intermediary distribution report, focusing on asset manager strategy for product distribution through financial advisors, and the other, which we’re going to focus on today, is our US advisor metrics report that provides a broad and deep perspective on financial advisors by highlighting their most critical needs, risks, opportunities, and challenges.

Benz: We want to delve into that report. But before we do, maybe you can just talk about how you do the research, how you balance qualitative with more quantitative research.

Blake: It’s a huge component of how we put together both our off-the-shelf research and our consulting work. And the primary quantitative components are derived from survey work and proprietary sizing methodologies. The market-sizing data is among the industry’s most trusted. We also have surveys going out on an ongoing basis to different audiences within each Cerulli practice. The ones that are most in my purview are our annual survey of asset manager distribution personnel—think heads of distribution, key accounts, wholesalers. And the other I’m really close to, which is perhaps the most critical to Cerulli, is the administration of the industry’s longest-running annual financial advisor survey, which has been going for more than 30 years. With that, we gather input from over 2,000 advisors annually operating across all channels, including wirehouses, broker/dealers, RIAs. And beyond that, it’s really a mix of research interviews with the same audience we survey, advisors, broker/dealer, home-office personnel, asset manager executives and everyone in between.

Arnott: Well, as you mentioned, the report we’re going to focus on today is the report called US advisor metrics. What do you think was the most surprising finding in this year’s report?

Blake: For me, it’s the rapid evolution of advisor portfolio construction and the fact that clients are often uninformed about the wildly different characteristics and experience they can have between firms. Cerulli predicts that brokerage business is going to decline from 27% of advisor portfolios in 2023 to an estimated 19% in 2025 for those advisors registered with a broker/dealer. Another thing that really stood out to me is the discrepancy in ETF adoption between advisor channels. Independent RIAs are allocating 35% of their portfolios to ETFs on average compared with 21% for all advisors. And within that same space, retail bank and insurance broker/dealers have only adopted ETFs at about 13%, which is the least among all channels as proprietary product use is really prevalent in those channels. So, the vast discrepancy in experience and product use between channels, I think, is really interesting.

Benz: We want to delve into some of those issues, but I wanted to ask about 2022, which was a bad market environment for both stocks and bonds. Can you talk about the impact there for the financial advisory industry and maybe financial advisors specifically, the people?

Blake: Absolutely. I don’t think there was much of a negative impact to financial advisors or really the advice industry as a whole as you might expect during a rocky market year. Advisors have made long-term planning a real core focus of quiet discussions. I think a refreshed interest from asset managers and the retail investor has led people in search of advice. And also, the percentage of retail assets being professionally managed has grown from 40% a decade ago to 49% today, which is nearly even with institutional money. I think that broker/dealer consolidation and fee compression have been much bigger headwinds for advisors than market volatility and challenges in both fixed income and equity markets like we saw in 2022.

Arnott: The report spends a fair amount of time and has a lot of data on market sizing in the various channels. But overall, if you look at the total number of advisors, it’s been pretty flat over the past decade. But you found within that the number of independent RIAs has been growing much faster at about 10.6% a year. Why do you think that is?

Blake: I think consolidation is a big factor when you’re looking at the overall number of advisors staying relatively flat headcount-wise. But for independent RIAs, advisors are really growing in that segment a lot faster as they seek to move to independence during the core part of their careers. There are hardly enough new advisors entering the industry to offset retirees, but those advisors that are comfortable with where they’re at in their career with an established client base, they’re willing to take that leap to independence to better the economics for themselves.

Benz: In the report, you do note that you expect to see wirehouse firms continue to lose market share. Is it just the flip side of what you were just talking about that you see the exodus of advisors from the wirehouse firms to those independent RIAs?

Blake: That’s right on point. We directly attribute the continued loss of market share for advisor headcount in the wirehouse firms to advisors feeling more comfortable than ever operating independently, wanting to control their payout. And I think another factor there is that third-party technology is needed, so they don’t need as expansive of an infrastructure provided by a home office to necessarily operate their practices at the same level.

Arnott: One thing I thought was really interesting is that even though the wirehouse channel has been losing market share, it still has more than a third of all advisor-managed AUM. And if you look at AUM per headcount, it’s the most efficient and productive channel. So, it seems like maybe there’s a conflict there where it seems like it’s the model that works best in some ways, but at the same time it’s losing market share in terms of headcount. So, do the wirehouse firms need to be doing more to make their business models or their payouts more attractive to advisors?

Blake: For the advisors that are after that full independence, it’s going to be hard to combat that mentality. But I would say that wirehouse firms are still really attractive, but only to certain advisors. They’re a great place to train and get your licenses and really learn the industry. But wirehouse advisors are identifying access to services relevant to high-net-worth investors as the top advantage of affiliating with their firm. So, while wirehouses have similar advisor headcounts, both RIAs and the national and regional broker/dealer segments, they have more than double that AUM share.

Another factor is wirehouses are the most aggressive at pruning their client base or really asking a client to leave if they don’t fit into their practice growth ambitions or really raising the average assets under management they require for a new client. And that’s really not a mentality for every advisor. It’s really just for those advisors who feel comfortable connecting with high-net-worth clients, are well versed in the terminology necessary. And some advisors are after your average kind of mass affluent or less family as a better source of prospects for them.

Benz: Amy just mentioned that the wirehouse channel has about a third of the AUM in advisor assets. Can you give us the breakdown as you survey the landscape how assets under management shake out across what you see as the main channels?

Blake: So, I think the growth of assets in the independent hybrid RIA channels is the key point, but also the pure volume of assets that still remain in the wirehouse channels very worthy of the attention of asset managers. But I think the story in the other channels is really that the total number of broker/dealers have rapidly decreased over the last decade. The top 25 broker/dealers have increased their overall market share of assets under management to 92% of assets that are registered with a broker/dealer. So, I see that trend continuing, the consolidation in the near future, but we might see some leveling off because at some point, not everyone is going to be interested in a merger or being acquired.

Arnott: Another finding you talk about in the report is that the retail direct providers like Vanguard and Fidelity have been able to grow their assets at about 10.7% per year over the past five years, which you attribute to better technology, expanded range of services. Do you expect them to continue gaining share in terms of assets?

Blake: I think they’ll continue to gain share, but at a slower rate than we’ve seen in the last five years. There’s really such a retail boom and upgrades to app-investing during that period. That’ll be hard to repeat. Technology and accessibility, I think, are very closely related when it comes to the growth of direct providers. Still a nice entry point for young investors, mostly because of the accessibility. I don’t see that changing, but the rush of boom of everyone taking advantage of maybe downloading a Fidelity or Schwab app for the first time and making their first trades as it became accessible in that manner to them, I think we can attribute a little bit of that to a moment in time.

Benz: We want to delve into the composition of advisors today. Your report found that only about 19% of financial advisors are women. Why do you think the number is so low?

Blake: I think historically it’s an industry that has really struggled to give women an opportunity. I think that’s starting to change a bit. But not only were the opportunity not always present, advisors were trying to meet the head of the household, which historically had often been men looking to lead those conversations with financial advisors. But again, that’s really starting to change. More women are actively taking a role in household finances and involving themselves in discussions with advisors. I think advisors are happy about this. Broker/dealers are thrilled to encourage their advisors to go after this market. And I think also with so few women advisors out there, some practices have been really successful making their niche focused on women. So, I think historically it’s been a trend that’s slow to change. I think we’ve seen about 3-percentage-point growth in the number of financial advisors that are women in the past five years. So, it’s a slow trend, but we are moving in the right direction.

Arnott: You found that racial and ethnic diversity is even more lacking. So only about 3% of advisors are Black, 5% are Hispanic, and 4.2% are Asian. Why do you think those numbers are so low?

Blake: I think it’s the same reasons that are similar to why there’s so few financial advisors that are women. The opportunity has not been there historically. And I think this is a great opportunity to give some credit to what the retail bank broker/dealers have done. Thinking specifically of Chase has been really successful at this. That channel, the retail bank broker/dealers, have actually been the strongest at attracting diverse advisors, both when it comes to a better blend of advisors that are women and also a better blend of ethnically diverse advisors. And they’ve really paced all their competitors in that way. And I think they deserve praise for the way they’ve put branches and communities and look to replicate the makeup of those communities with their employees to help develop deeper personal connections with the clients who are coming into those branches. So, they’ve really led the way there in attracting more diverse advisors. And I can only hope that other channels are soon to follow.

Benz: We were surprised to see that only 42% of advisors have the CFP designation, which seems like the gold standard for financial planning advice. Does the CFP program need to do more work, in your opinion, to differentiate its designation from the other types of licenses like the Series 65, 66, Series 7, Series 6, which are more sales oriented or geared more toward sales-oriented channels?

Blake: I think there’s a few factors at play there. Many advisors are exiting the industry before reaching a stage in their career where they would even get that designation. The insurance broker/dealer channel, for example, has the most annual new hires, but they don’t have a CFP-oriented business model at all. So, they’re not really pushing their young advisors in that direction as much. Advisors that have the CFP are still set up for success. It’s a differentiator so long as they’re actually taking the steps to implement that planning into their practice and really using it as a core element of their value proposition.

Arnott: What are some of the biggest challenges advisors face when it comes to software and technology?

Blake: It continues to be integration. That’s a problem that’s magnified for independent advisors, especially independent RIAs who are tasked with sourcing that tech infrastructure themselves or really acquiring resources or building out the staff to help with those tasks. So, the higher degree of independence an advisor has, the more challenges they face when it comes to software and technology. But again, integration, accessibility, and training continue to provide a little bit of headwinds for advisors.

Benz: It seems like artificial intelligence is the topic du jour almost no matter what conversation we have. You note in the report that Morgan Stanley has been working with OpenAI to develop an AI assistant for its advisors to quickly get answers to common investor questions. Are there any other promising use cases for financial advisors to use artificial intelligence?

Blake: Well, it’s a fine line. We talked about the growth of retail-direct providers on the back of strong technology offerings and accessibility and quick answers to common questions using that technology through the app where maybe an AI is able to answer it without a live person needed to be there. But I’d mention that it’s a fine line because advisors also need to consistently demonstrate that they’re providing value beyond that in that interacting with a person and having your emotions fully understood and specific situations that AI will be able to weigh properly. I don’t think there’s going to be a huge rush to help the implementation of it as a core element of an advisor’s practice, but there’s certainly ways that they could and should be using it around the edges to improve efficiencies. I think compliance and performance reporting are two huge areas where there’s really no reason not to look into developing AI and more tech in that space.

Arnott: That seems like there might be other applications on the back end with rebalancing and integrating third-party accounts and things like that.

Blake: That’s right. I think broker/dealer, home offices, and even asset managers are probably a little more excited about some of the use cases for AI and their day-to-day operations. The relationship and the quality client service is still really important to clients, and advisors need to tout that as much as they can.

Arnott: Going back to independent RIAs and the challenges they face with software integration, what do you think technology providers should be doing to address that issue? Is it mainly developing more all-in-one solutions or making sure that their platforms can connect to other broadly used platforms?

Blake: I would say the three primary things to think about there are costs, pockets are constrained, and RIAs need to drive maximum value for their technology. It’s important to remember that 60% of firms in the RIA space have less than $100 million in assets under management, so there’s not a ton of extra spending to go around on technology. The second factor would be ease of use. RIAs are definitely limited in their time and need tools that are strong out of the box or at least supported with tech side support so they can leverage it efficiently in their practice without a huge learning curve. And the third thing to consider there is integration. Much like ease of use, advisors need technology tools that are talking to each other in an effective manner to ensure that they can actually make it an efficient tool to implement without really needing to become tech support themselves and dedicated being days or weeks even to just understanding how a new system works.

Benz: Following up on your earlier comment about retirements and why the number of advisors has flatlined. It does have to do with retirements apparently where over the next decade about 110,000 advisors plan to retire and those people make up about 38% of industry headcount and 42% of total assets. That seems like a huge number. Does the industry have enough younger advisors to fill the gap?

Blake: Well, I want to reiterate that it is a huge number. Over 41% of assets set to retire in the next 10 years means that there is going to be money in transition. It’s a concern in the industry. The industry is really struggling with a high burnout rate for new advisors, or trainees. Many advisors that are eyeing up retirement are willing to be the mentors that they aspire to be or maybe imagine themselves as when they’re going to transition their practice. I think a little bit of that is human nature—it’s best intentions to as you move it on to the next stage, spend extra time training the next person to fill the role, giving them increasingly meaningful tasks that are going to develop them and allow them to really interact with clients. But also on your way toward retirement, it’s hard to train people well and it’s hard to be a good mentor consistently. So, I think sometimes the aspirations don’t line up with how it plays out. Advisors that are getting especially close to retirement naturally are going to be taking more vacation time, delegating more tasks. Adding mentoring as an additional task, which is really a time-consuming role, it doesn’t happen to the extent advisors like to believe it well.

The other important thing to consider there is that the average rookie advisor age is 37 years old. For most advisors, it’s not a first career. I think broker/dealers need to do a better job of appealing to recent college graduates, for example, making their training and ramp-up process and getting licensed more appealing by also setting them up with advisors who are going to be those mentors and be held in check through some component or some system to actually help develop those advisors and give them substantial tasks to work on.

Arnott: With the older advisors who are heading into retirement, it seems like maybe allowing them to downshift to a part-time or flex-time schedule would help smooth this transition so that instead of retiring at 65 and then disappearing from the practice at that point, they might have a much longer transition period of five or 10 years maybe of working part-time. Are enough advisory firms making that type of schedule possible, in your opinion?

Blake: I think they are. The advisors themselves are often the ones to hold up succession planning. The emotional toll of transitioning clients and finding a successor or a proper buyer are the two biggest challenges advisors face in regard to succession planning. So, it’s really putting in the time to think five, 10 years out of the plan that’s going to be set in motion. I would say that a lot of advisors who are near retirement are probably operating with a pretty flex schedule. And that’s also some of the things that holds them up on efficient transition of a practice is they’re not really as involved in the day-to-day operations and transition and training.

Benz: I wanted to ask about some of the college programs that have come online just over the past decade where universities are having a financial advice program. And a lot of these students are emerging with their CFP designation or at least have gone through the coursework. Do you see that as a way that the industry is potentially going to address the fact that retirements are coming hot and heavy over the next decade?

Blake: I personally love that idea and the idea of beginning the CFP process while you’re in college. Broker/dealers should absolutely be working to expand their programs and be sponsors where they can and be visible on campus with financial education events. Really appealing and making the industry seem more exciting. And that sounds a little harsh at times, but the financial-services industry as a whole has been a little slow to modernize and develop in a variety of areas. And I think for new college grads, they want to know that the industry they’re joining is not one that’s on the way out and all they hear about is fee compression and consolidation. They need to understand that the business is just changing, and financial planning has become more important. I think, really, broker/dealers need to do a better job of staying integrated in the CFP program. I think the CFP board has a lot of goals of making that even more visible. So that all is great stuff to me, and I think will really help address some of these issues we’ve talked about.

Arnott: We also wanted to talk about the range of services that financial advisors provide. And I think one interesting finding of the report is that if you talk to advisors, six out of 10 believe that they are financial planners, but only 25% of those actually meet Cerulli’s definition of financial planning. Why do you think there’s so much blurriness around what financial planning really is?

Blake: Well, Cerulli is fairly strict in our definition of a financial planner. So that’s the component here. But advisors aren’t always honest with themselves about the extent of their capabilities or offerings. First, really to consider you a financial planner, it’s really determined through a series of survey questions. But in short, you must offer a full range of planning services as a core component of your practice, including tax and insurance, among other qualifiers. The many advisors who define themselves as a financial planner are in reality offering more limited services and doing more case-based financial planning, thinking more in lines of education, 529 plans when they come up, charitable giving if there’s a lump sum or something like that, maybe estate work. So, these advisors are ad hoc doing some of these planning cases, do not meet Cerulli’s definition of a financial planner. So, there is a little bit of a strict definition there, but also advisors are not as comprehensive as they like to imagine themselves.

Benz: Well, speaking of that, in the report you note that about 55% of all advisors offer estate planning services and 46% offer tax planning. Those numbers don’t reflect advisors who are actually drafting estate plans and doing multiyear tax planning. I was wondering if there’s a little bit of a disconnect there in terms of what advisors are saying they’re doing with respect to some of these services and what they’re actually providing?

Blake: So, I think this comes down to a question that’s a little ambiguous. It’s asked in the style of what does your practice offer. So, some larger advisor practices certainly have in-house staff handling some of those issues, but others might see a partnership with an estate attorney as an extension of their own practice, and they answer yes. So, it’s really more, so the way I like to think of that stat, is that that’s about the number of advisors who are at least accounting for that part of the financial picture when they’re working with the client. So, they tend to be more financial planning-oriented and at least they’re able to direct their clients pretty directly with someone they know can offer them services like trust or estate planning.

Arnott: We actually talked to Peter Mallouk at Creative Planning a couple months ago and Creative Planning actually does offer estate planning services and tax preparation, tax planning as part of its core offering to its clients. What do you think about that type of one-stop-shop model? Do you think more advisors will move in that direction?

Blake: So, I love what Creative Planning started in that sense. They’ve continued to climb up our RIA leaderboards each year. And I want to set the stage here because I think it’s important to define how Cerulli is viewing the RIA consolidators. We put them in two buckets: major consolidators and emerging consolidators.

So I’ll start with the emerging consolidators because that’s where Creative Planning falls. These are RIAs that have demonstrated a recent pattern of consolidation, but really have yet to reach what we define as substantial scale or exhibit several consecutive years of a steady stream of acquisitions. Other firms that fall under this bucket would be Crescent Capital, CI Financial. And then the other major bucket is major consolidators. So, these are the large RIA acquirers and platforms that have regularly been engaging in consolidation over the past five, 10 years. They’re offering a set of centralized services like marketing, compliance, technology. Additionally, you can tap on them for growth capital, succession planning solutions. These are firms like Mercer, Hightower, Dynasty, Steward Partners.

So, I think that in general, independent RIAs tend to want more autonomy, but some are going to gravitate toward Creative Planning’s model of high centralization because they can still build that independent financial value, but others are going to want the full autonomy and that’s why they joined the channel in the first place. So those advisors would be more likely to join a firm like Focus Financial.

But Creative Planning, what they’re doing is essentially giving optionality to advisors who are looking at independence. So, when we talk about the growth of that channel, there’s even more options for advisors to find the right fit for them. And on the flip side of this, asset managers are recognizing the importance of these RIA consolidators. Some of them are starting to operate like broker/dealers in a sense where they need to have home-office relationships. They’re dedicating more resources to covering these firms through wholesaler and key account coverage. So, the growth of the consolidators is very much important to, I think, both advisors and what they’re thinking about for their own careers, but also for asset managers trying to distribute product.

Benz: I wanted to ask about the fact that only 9% of the advisors that you surveyed are money managers. So, these are people focusing exclusively on building portfolios. Do you think this number will eventually go even further down, maybe all the way to zero as investment management becomes more of a commodity and more practices do embrace the holistic financial planning that you’ve just been talking about?

Blake: That’s a fair question. I tend to think that most of the decline in advisors who operate solely as money managers has really already happened over the last decade, though a bit more is certainly to be expected. I see that leveling out as the advisors that are responding to our survey and telling us that exclusively what they do is manage money, they may be operating with that as their entire value proposition, and maybe they’re touting an expertise in certain asset classes or whatever it may be. They’re openly telling clients to get planning elsewhere if they want it. They’re not trying to do that. It’s a much narrower window for advisors to operate in, but if they can pull in a portion of high-net-worth client assets and build themselves with an investment expert, it can still be a successful model, but certainly not for everyone.

Arnott: It seems like one interesting pattern, if you look at the distribution of household wealth in the US, there’s a huge majority, almost 87% of households have less than $500,000 in investable assets, but at the same time, almost half of all advisors mainly work with investors who have more than that, so between $500,000 to $2 million in assets. In other words, most advisors are focusing on a different wealth segment where the majority of households don’t have that level of wealth. Do you think robo-advisors can help fill that gap by providing lower-cost solutions for mass market and middle-market investors? Or is it more the case that if you have a lower level of investable assets below $500,000 or so, you might not need that much advice to begin with?

Blake: I think it’s a little of both. As far as the robo-advisors go, there’s been little uptick since their mid-2010s boom. Asset growth is cool. A lot of firms are closing or merging. It seems like the most successful ones are really arms of larger firms like Vanguard’s Personal Advisor Select or Schwab’s Intelligent Portfolios. They might be good starting blocks for the least affluent to have a low-cost managed account, but very few of them have the services as primary providers, and many firms are really struggling to get assets to scale. So, to me, it’s increasingly looking like stand-alone robo-advisors will be of secondary or even tertiary importance to most investors. I think the accessibility to retail direct and the prevalence of broad-based ETF investing is more so the middle ground where those investors who don’t feel they need advisor help yet are willing to land.

Benz: We wanted to delve into fees and pricing in the investment advice space. About 69% of investors between the ages of 40 and 49 say they’re willing to pay for advice compared with just 60% of investors over age 70. What’s going on there? Why the disconnect?

Blake: I think that’s a bit of a nuanced stat. I would really want to place the focus there that there’s a large shed of the 40-something investors who are willing to pay for advice, and that’s because they are also the group that is looking for a more informed advice relationship than what they currently have. They’re entering the maximum earning phase of their life. They’re expecting to need more advice. They know that there’s lots of financial situations, both at play and coming into play with families, education planning, retirement planning becomes a little bit more pressing. The second factor there is on the older side, we do see an uptick in those investors over 70 who aren’t quite as involved; they don’t even wish to be at that point in their investments, possibly because they’re entering that deaccumulation phase and have probably met many of their early savings goals. So, they feel a little bit more comfortable taking a backseat and letting their asset allocation play out at that point.

Arnott: In terms of fees and pricing, on the investment management side, there has obviously been a huge amount of downward pressure that has compressed expense ratios for mutual funds and ETFs, but if you look at investment advisory fees, they’ve been much stickier and averaging around 1% of assets year after year. And you found that most advisors still don’t plan to change or reduce their AUM-based advisory fees over the next couple of years. Why do you think financial advice seems immune to pricing pressure at least so far?

Blake: Well, I would agree that the 1% is sticky, but I think this fee has been changing more than maybe we give it credit for when looking just at the stats there. The reason I say that is clients are expecting more services than ever as part of their relationship with financial advisors. So, while the 1% hasn’t moved much, the amount of services advisors are offering has gone up. So what advisors are getting paid per service, if you want to think about it that way, has gone down. So, the 1% eventually compression can only go so far, so I think that’s a good place to land. I personally think 1% is quite fair when working with a great advisor, especially if that includes comprehensive financial planning, but I think the 1% is really a great sticking point for the near future. I don’t see that changing much.

Benz: In the report, you write, “Though the momentum of asset-based fee adoption is high, Cerulli stresses that they are not a one-size-fits-all solution. The flexibility of client service offered by alternative fee types such as annual or hourly fees can give firms an edge in the fee-based business and should not be overlooked.” So why do you think advisors have been slow to adopt those other pricing models?

Blake: For a lot of advisors, they’re still working through the transition from brokerage into fee-based. So, going beyond just fee based and tailoring different situations for different clients, it’s too time-consuming for many advisors. It also can be hard to scale. There’s a lack of resources for advisors to explore the economics of what these different type of fee arrangements might look like long-term. Maybe even more importantly than any of those is that they can’t look down the road and really see a lot of easy-to-follow examples of how their competitors are implementing different structures. I think to date, we’ve seen a lot of—the more higher-net-worth clientele you tend to work with thinking about family offices, for example, they’re going to be the ones that are leading the way on these unique payment models.

Arnott: One area where I think there has been more of a change with pricing has been the number of advisors who charge for stand-alone financial plans. Is that an easier sell for them to charge a fixed price for a stand-alone financial plan, because clients are getting something tangible in return that is easier to attach a dollar amount to?

Blake: That’s definitely the most common type of different fee that an advisor is going to implement. It’s probably the first one that they’re going to explore, especially if they’re fee-based and haven’t been doing planning, maybe they start off by doing that ad hoc for one or two clients. They’re judging what to charge that client for those services. It could be a flat fee. I think advisors tend to undersell themselves at first with the value of their financial plan if they’re going to charge a standalone fee for that and often find themselves after a few months raising their price fairly substantially for future clients who they’re going to offer those services to. So, yeah, that’s definitely the first and probably easiest way to implement it. Hourly fees are a very interesting thing for me to think about, because the water gets a little muddied, I suppose, when thinking about how that translates and how clients are acting on that advice and what you should be charging for that. So, there’s not a lot of good examples of how advisors are implementing that.

Arnott: Is that because there’s kind of the hours that you spend meeting with the client, but then there might be, in addition to that, several hours needed to prepare for client meetings, and it might get hard to match up what’s going on behind the scenes with what the client is perceiving?

Blake: There’d definitely have to be a conversation or agreement that really articulates the extent of the hourly relationship, which is just another hurdle for advisors to cross when exploring some of these different fee models. I think it’s just complicated. They don’t know how to approach it. There’s no right or wrong way. They can charge fees in various manners and occasionally will come across some interesting setups for advisors, but it’s just hard for them to figure out something new.

Benz: Another surprising statistic from the report is that 19% of investors report that their financial advice is complementary. That’s down from 28% in 2013. But we’re wondering, is there a disclosure problem there? Do you think it’s more of a terminology issue where the advisor says that they’re charging for portfolio management, but not financial planning advice? What’s going on there?

Blake: I think it’s a terminology issue due to really evolving practice models. Advisors are just more commonly explicitly stating that they are charging for the planning advice portion now. They’re coming out of this transactional-based mindset with their investments and how they operate their practices and are listing out their services to include that financial advice. If advisors are forced to offer more planning services to be competitive, they want their clients to know they are paying for that. So, it’s a terminology in a survey-answering view question there.

Arnott: We also wanted to talk a bit about the investment side, about the types of investments and asset classes that advisors are using with their clients. I was surprised to see that about 24% of all advisors are still creating custom portfolios for each client, which seems like a really high number. Do you think that standardized models will become more popular?

Blake: I think that there’s a bit of advisor bravado at play in that 24% of advisors who say they’re still creating custom portfolios for each client. While actually doing that is the entire value proposition for a very small number of advisors, I’d wager that a large chunk of that 24% are building portfolios that are fairly similar among different risk tolerances and for different clients. So, I think that probably leans more toward advisors who are creating models within their own practice and using those models just based on asset allocation or risk tolerance.

But I think that models are definitely going to become more popular. For advisors who have scaled their practice, the largest practices are spending a lot less time on investment management than smaller advisor practices. A lot of that is due to finding efficiencies using models, whether it’s models that they’ve built in-house, whether they’re leaning on their broker/dealer or custodian for influence there, or there’s even a small set of advisors, I think around 12% or so across all channels, who tell us that they get their models from a third party and entirely rely on those.

Benz: You depict the average asset allocation. We saw that the average asset allocation for a moderate risk advisor was 45% US equity, 22% US taxable bond, 12% international equity, 4% muni, 4% emerging-markets equity, and on down the line. Maybe you can talk about how that asset mix has changed over time?

Blake: The way Cerulli looks at average asset allocation through that moderate risk advisor is really just a once-a-year snapshot of where things stand. So, Cerulli doesn’t really try and predict asset allocation or make that the strong point of any of our research areas. We’re reporting on what the current state of things are. Looking at that snapshot, I believe that’s from perhaps mid-2023 or toward the end of the year there. But over time, it stayed fairly stagnant, but we have seen an uptick gradually in the use case for alternatives within that asset mix. Advisors tell us that they need the greatest assistance with understanding liquidity, product due diligence, and the fees associated with alternative investments. Advisors most importantly tell us that they want to learn more. This is a very exciting and new topic for many of them. Webinars and educational classes through platforms like iCapital, Case IQ are very popular. We also hear all the time from both the asset manager side and advisors that anything educational and interactive, potentially for CE credit that asset managers can provide to advisors right now for alternatives is really going to be a high success rate for getting advisor engagement.

Arnott: Are there any other areas or asset classes that advisors have expressed interest in learning more about or potentially using more with their clients?

Blake: I think that fixed income and alternative are key areas where ETF issuers tell us that they see unmet demand. So, I think that product development there will really aid further adoption, and it has in the recent years, too. But I think we’ll see likely a bit of an uptick in asset allocation regardless of market circumstance if we’re thinking just long-term allocations here in both of those areas due to the accessibility into those products and fees decreasing. Ultimately, the reasons advisors are choosing an asset manager comes down to track record, consistency, client service, and firm reputation. Now on the flip side of that the top reasons advisors tell us really that they fire an asset manager are volatility, poor client service, and fees. So, if an asset manager is to be consistent and provide good client service and fees within range for the product, they stand a great chance of keeping assets on the books despite development of additional products and maybe more assets tilting toward alts and fixed income in the future.

Benz: The report notes that advisors expect allocations to separate accounts to increase from about 8% to close to 10% by 2025. What’s the main appeal? Why are we seeing this trend toward greater separately managed account adoption? Is it cost, tax efficiency, direct-indexing trend? What do you think is going on there?

Blake: I really think you hit on the primary components there. These things have all mattered to the growth of the product in our predicted future growth here in the near term. Technology has really made them more accessible than ever with minimums getting lower and I think that will be the primary reason we see enhanced use in the near term is that more investors can afford to utilize them or hit those minimums. The wirehouse channel is really well beyond any other channel in terms of using separate accounts. They’re using them—I think about 18% of their product allocation goes to separate accounts, that’s around 8% for all advisors across all channels. So, 10-percentage-point greater adoption of separate accounts for wirehouse advisors and also, we’re predicting the greatest percentage of growth in all products to be in separate accounts. So, if you’re distributing separate accounts, wirehouse advisors are continuing to be a key market for you.

Arnott: Are there any negatives associated with separate accounts?

Blake: Less than half of advisors tell us that they’re actually using SMAs still, only about 46% say they’re using them to any degree. So, there’s still a learning curve to go there especially in regard to direct indexing. I think the other downsides are reporting can be difficult—technology is helping there—and historically, we’ve seen a lot of exclusive minimums that are continuing to trend down. But some strategies aren’t really aiming to make themselves more accessible, so they just will never be a good fit for certain clients.

Benz: Another surprising finding at least to us was that upward of 90% of advisors use individual securities. Can you talk about why that is? And also do you see differences by channel, by different advisory channels?

Blake: For individual securities, that’s pretty even across channels. I think it’s a little bit lower use case for the independent RIAs, but that percentage is not measuring the magnitude of use. It’s just, if you’re using one individual security, you might answer yes to that. So, my view is that most advisors, even those using models or funds primarily, they have at least one client who has a stock or two that they love, and they want individual exposure to for whatever reason. That said, we have many advisors who are operating, and they began their career as stockbrokers, and they’ve had a tough time breaking away from that being their core offering. So, they might like to see what they’re able to do adding a little alpha to portfolios by selecting individual names.

Arnott: Well, Andrew, thank you so much for taking the time to talk to us today. I’ve been a longtime reader and fan of Cerulli reports in my various roles at Morningstar. I just really love the wealth of data as well as all of the commentary and insight and interpretation that your analysts provide. So, it’s been great to talk to you about this report in more detail.

Blake: Great. Thank you for having me. It’s been a pleasure talking about all these topics and hopefully, we’ll get to chat with you in the future.

Benz: Thanks Andrew.

Arnott: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.

You could follow me on social media at Amy Arnott on LinkedIn.

Benz: And @Christine_Benz on X or Christine Benz on LinkedIn.

Arnott: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

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