Lost in Fees: An Analysis of Financial Planning Compensation

Abstract

It is often difficult for clients to assess how much compensation they pay to financial advisors. Different forms of compensation within the financial advice industry may contribute to this complexity. This article investigates whether clients are able to estimate accurately how much compensation they pay to their primary financial advisor. Clients were asked to estimate the amount of fees they paid to their advisors in the previous 12 months. The data show that around 17% of clients do not know how their primary financial advisors charge for their services and that 32% of clients do not know how much they have paid in the last 12 months. Of the two-thirds of respondents who think they know how much they paid, 80% gave an estimate well below the industry standard. The probability that a client is unaware of the exact fees they pay becomes even higher when compensation is a blend of fees and commissions. The results suggest that many clients underestimate how much they pay in fees for financial advice.