Older, wealthier investors are changing their investment advice preferences. No longer do they just sign up for financial advice from a Certified Financial Planner (CFP) to manage all of their assets, pay a management fee north of 1% and follow the advisor’s recommendations blindly. The rapidly growing robo-advisor trend, along with investors’ growing sensitivity to both high fee funds and high fee advisors, is changing how older investors manage their money.
Where Investors Get Advice
A recent study by Hearts and Wallets, Explore Pre/Post-Retirees 2016: Digital Habits Revealed, found that one in every four 53 to 74 year olds are likely to combine guidance from both online resources and paid financial professionals. Survey participants had investment assets ranging from $500,000 to $5 million. Overall, this segment of the market includes 4.5 million households with close to $8.5 trillion in investable assets.
The research shows a growing willingness by older investors to gain information online, with digital information consumption up 8% compared to a year ago. About half of 53 to 64 year olds count on the internet for financial information, an increase from 41% in 2015. Five percent rely solely on digital information for financial guidance, like many of their younger peers. Clearly, the trend towards using online financial advice is growing among older Americans. Yet, financial advisors are still important to this group nearing or already in retirement.
The Hearts and Wallets survey also found an emerging trend in how older investors sought financial guidance from advisors. It appears that older investors’ appetite for fees derived from a percent of assets under management (AUM) is declining in exchange for a flat fee tied to specific financial services model. This is causing quite a conversation among financial advisors who need to reevaluate their compensation models. (For more, see: A Shakeup Is Coming for the Advisory Industry.)
Drivers of This Shift
Ultimately, the internet is driving these changes. More financial information is available online than ever before. Research that shows the negative impact of high fees on long-term returns is widespread on financial websites. Access to lower-fee investment advice across the automated advisory industry as well as within hybrid robo-advisor models is also driving the changes in investor behavior. (For related reading, see: Why the Wealthy Will Always Need Human Advisors.)
Financial decisions are difficult and the results of these choices are consequential. For example, if you claim Social Security benefits early, rather than later, you sacrifice a larger monthly premium for a smaller one. For these complex decisions, consumers seek information from several sources to make the most informed choices.
Laura Varas, founder of Hearts & Wallets, highlighted a shift in the needs of investors for financial advice in a recent InvestmentNews article. She said investors are shifting from guidance in choosing investments to a desire to gain information, expert knowledge and support when navigating the investing waters.
Implications for Advisors
Changing investor behaviors is encouraging advisors to find other ways to do business. Spectrem Group added to this conversation in a recent report entitled, Advisor Relationships and Changing Advice Requirements. The study found that investors were more interested in a trusted relationship with their advisor than absolute returns. Spectrem found that one of the most important traits investors seek from their financial advisor is regular communication and a proactive approach. Only 30% of participants in the Spectrem study said they would fire the advisor for losses over a two-year period.
The Bottom Line
Older affluent investors are increasingly combining online and human advice. They prefer holistic financial planning guidance and regular communication. Financial advisors must be flexible and sensitive to the targeted needs of their clientele, and may find that new digital tools can help them cater to these preferences. (For more, see: What Millionaires Think of Human Vs. Robo-Advisors.)