Financial Advisors Value Proposition and Compensation The Value of Financial Advice

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1 Financial Value Proposition and Compensation The Value of Financial Advice Quantitative Research Frequencies Blame complex fee models, squeamishness about discussing money, or hesitancy to ask uninformed questions. Whatever the reason, many investors are mystified when it comes to advisory fees - and they re seeking greater value from their financial advisors along with a clearer understanding of services provided. It s important that advisors and investors are on the same page when it comes to understanding the fees an advisor charges vis-à-vis the services they provide. I. Choosing an Advisor. n How important do you think each of the following is to clients when they are selecting an advisor? n How important is each of the following to you when selecting an advisor? Understands my financial needs and goals Is upfront with me and represents situations truthfully Has a high level of integrity Follows through on goals and promises Welcomes open and honest communication Has my best interests at heart During the third quarter of 204, State Street Global Practice Management conducted a study among a nationally representative sample of financial advisors and individual investors to explore their perspectives on the topics of communicating value and discussing fees. This findings summary document is one in a series of practice management offerings that explore topics within the comprehensive value of the advisory relationship of interest to both advisors and investors. Investment professionals can obtain these and other materials by contacting their Regional Consultant or the SSGA Sales Desk at Keeps me informed on a regular basis Acts and performs consistently Works for a reputable firm Knowledgeable about new and innovative investment products Is highly recommended by a family member, friend or colleague Is a top performer Charges low fees and/or commissions 74 76

2 2. n What traits result in clients feeling like they are being provided excellent client service? n What traits result in you feeling like you are being provided excellent client service? Trustworthy Knowledgable Responsive Active listener Consistent Proactive Personable Transparent State Street Global 2

3 II. Compensation 3. n How do you charge for your services? n How do you pay for your advisor s services? Percentage of assets n Do you collect performance fees? n Does your advisor collect performance fees? Yes No Retainer flat fee 3 8 Don t know 0 2 Project based flat fee Fee plus commission n Is your compensation negotiable? n Do you or did you negotiate what you pay your advisor? Commission only 6 28 Yes No What percent of your clients do you charge each of the following? Commission 38 Percentage of assets Fee plus commission Depends on asset size n How well do you think most clients understand the fees and/or commissions being charged? n How well do you understand the fees and/or commissions being charged? 5. How would you prefer to pay for your advisors services? Percentage of assets 8 Understand completely Retainer flat Fee 27 Project-based flat fee 6 Understand fairly well Fee plus commission 8 Do not really understand 3 7 Commission only 30 Do not understand all n Is your compensation bundled or unbundled? n Is what you pay bundled or unbundled? Bundled 76 6 Unbundled 24 2 Don t know 0 8 State Street Global 3

4 0. n Do you discuss fees and/or commissions with your clients? n Does your advisor discuss fees and/or commissions with you? 3. n How fair do you think your clients feel the fees and/or commissions being charged are? n How fair are the fees and/or commissions being charged? Yes No 8 33 Extremely fair n How frequently do you discuss fees and/or commissions with your clients? n How frequently does your advisor discuss fees and/or commissions with you? Reasonably fair Somehwhat fair Completely unfair Quarterly Yearly Once every 2 5 years How much do you agree with the statement: My advisor provides objective advice without regard to the fees or commissions he/she collects? 93 Only when fees are increasing 3 0 Strongly agree 39 Only when client raises subject 5 5 Agree Disagree n How satisfied do you think your clients are with how fees and/or commissions are discussed? n How satisfied are you with how fees and/or commissions are discussed? Strongly disagree Extremely satisfied 40 3 Reasonably satisfied Somehwhat satisfied 4 8 Completely unsatisfied 0 State Street Global 4

5 5. n What is the number one reason why you think your client would rather be charged a fee versus commission? n What is the number one reason why you would rather be charged a fee versus commission? Know what they are going to be paying upfront They trust that their advisor is not selecting costlier investment products to drive up commissions Advisor is invested in their success Overall, how satisfied are you with the compensation you are collecting from your clients? Extremely satisfied Reasonably satisfied Somewhat satisfied Completely satisfied An actively traded account could result in high commissions, costing more than fees They can deduct advisor fees on their taxes n Overall, how satisfied do you think your clients are with the fees and/or commissions they pay for the value of services they receive? n Overall, how satisfied are you with the fees and/or commission you pay for the value of services you receive? 97 9 Extremely satisfied Reasonably satisfied Somehwhat satisfied 2 8 Completely unsatisfied State Street Global 5

6 III. Communication 8. n How frequently do you communicate with your clients? n How frequently does your advisor communicate with you? Daily What percent of communication is conducted via each medium? Telephone Face-to-face meetings Weekly Monthly US mail 2 2 Quarterly 4 46 Social media 9 2 Yearly 2 Text Would you prefer to communicate more often, less often or at the same frequency? More often What percent of communication would you prefer is conducted via each medium? Telephone Less often 2 2 Face-to-face meetings Same frequency US mail 0 0 Social media 9 2 Text 8 4 State Street Global 6

7 IV. Overall Advisor Performance 22. n How much do you think your clients feel that each of the following statements applies to you? n How much do each of the following statements apply to your advisor? Is upfront with me and represents situations truthfully n Overall, how satisfied do you think your clients are with the services you provide? n Overall, how satisfied are you with the services your advisor provides? Extremely satisfied Understands my financial needs and goals Reasonably satisfied Has a high level of integrity 9 92 Somehwhat satisfied 2 3 Follows through on goals and promises Completely unsatisfied 0 Welcomes open and honest communication Has my best interests at heart Keeps me informed on a regular basis n Have you ever asked your clients for recommendations about how to improve your relationship? n Has your advisor ever asked you for recommendations about how to improve your relationship? Acts and performs consistently Yes Works for a reputable firm 87 9 No Knowledgeable about new and innovative investment products Is highly recommended by a family member, friend or colleague Is a top performer Charges low fees and/or commissions n Has a client ever referred you to a family member, friend or colleague who as a result became a client? n Have you ever referred a family member, friend or colleague to your advisor, who as a result began using your advisor? Yes n Overall, how much do you think your clients trust you? n Overall, how much do you trust your advisor? No Completely trust Reasonably trust Somehwhat distrust 2 4 Completely distrust 0 State Street Global 7

8 V. Participant Profile 27. Gender 30. Education Some high school or less 0 Male Completed high school 3 6 Female Trade/technical school Age Some college Completed college Graduate degree Income Under $50, $50,000-$99, Race $00,000-$99, Caucasian $200,000-$299, African American 6 $300,000 or more 6 2 Hispanic 0 3 Asian 5 American Indian Other State Street Global 8

9 32. Firm Type ETF strategist n Firm Size n Advisor s Firm Size Independent broker/dealer 8 Botique 2 8 Insurance broker/dealer 4 Small 7 8 Multi-platform/direct National broker/dealer or wirehouse 0 5 Medium 4 28 Private bank 0 Large Regional broker/dealer 4 Registered investment advisor (RIA) Retail bank Average Account Under Management $500,000 $999, Retail defined contribution (DC) 4 $ million $4.9 million Advisor Type $5 million $9.9 million $0 million $24.9 million 6 7 Certified financial planner (CFP) 50 $25 million or more 9 Registered investment advisor (RIA) 25 Broker Household Investment Portfolio Size Insurance agent Other 5 3 $50,000 $49,999 $500,000 $999, $ million $4.9 million 8 $5 million $9.9 million 3 $0 million $24.9 million $25 million or more State Street Global 9

10 Research Methodology A nationally representative sample of 300 financial advisors and 300 individual investors participated in an online survey undertaken by State Street Global Practice Management and a2b planning in August 204. The advisor sample is representative across different channels: independent broker/dealer; multi-platform/direct; national broker or wirehouse; private bank; and registered investment advisor, all with average accounts under management of at least $500,000. The investor sample is representative across both net asset bands: below $ million; $ million to $5 million; and above $5 million and age bands: 25 to 39; 40 to 49; 50 to 59; 60 to 69; and 70 and older. Quotas were established to ensure the sample reflected the investment landscape today. All statistical significance is reported at 95. The surveys explored nearly identical themes, which allowed us to compare financial advisors presumptions about their clients against how investors actually feel. The data collected from this survey were segmented and analyzed to extract insightful and actionable opportunities. Questions were grouped into the following categories: How well do invesors understand financial advisor compensation? What role do fees play when an investor is choosing a financial advisor? Does understanding fees help or hurt how an investor views a financial advisor? Do investors think that the fees financial advisors charge are fair? To further contextualize our learning, we also conducted qualitative research with a range of leading industry, business and economic experts to help inform our key findings and practice techniques. They included: Phone interviews with 4 subject matter experts; In-home interviews with investors with a household portfolio of at least $50,000. If investment decisions were shared with a spouse, the spouse was included in the interview. State Street Global 0

11 About Us For nearly four decades, State Street Global has been committed to helping our clients, and the millions who rely on them, achieve financial security. We partner with many of the world s largest, most sophisticated investors and financial intermediaries to help them reach their goals through a rigorous, research-driven investment process spanning both indexing and active disciplines. With trillions* in assets, our scale and global reach offer clients unrivaled access to markets, geographies and asset classes, and allow us to deliver thoughtful insights and innovative solutions. State Street Global is the investment management arm of State Street Corporation. About Practice Management The cornerstone of our business is helping advisors succeed. We are inspired to make a difference by delivering a comprehensive practice management platform offering actionable insights and consultative solutions. Our programs are grounded in proprietary research and leverage the latest thinking and trends from both industry and academia. We offer a diverse range of capabilities that address forces shaping the investment landscape; best practices to drive results and optimize your business; conversation starters to guide and engage with clients; and continuing education to hone techniques and accentuate your value. * Assets under management were $2.37 trillion as of June 30, 205. This AUM total reflects approximately $26.8 (as of 6/30/5) with respect to which State Street Global Markets, LLC (SSGM) serves as marketing agent; SSGM and State Street Global are affiliated Learn More For more information on how these industry-leading practice management resources can support advisors most important business objectives, contact your Regional Consultant or the Sales Desk at ssga.com spdrs.com For public use. State Street Global One Lincoln Street, Boston, MA T: The views expressed in this material are the views of the Practice Management team through the period ended September 30, 205 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information. Investing involves risk including the risk of loss of principal. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA s express written consent. Past performance is not guarantee of future results. Standard & Poor s, S&P and SPDR are registered trademarks of Standard & Poor s Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation s financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index. Not FDIC Insured No Bank Guarantee May Lose Value State Street Global 205 State Street Corporation. All Rights Reserved. ID4288-IBG Exp. Date: 0/3/206 BG.PMCSR.06