By Jason Zweig, Anne Tergesen and Andrea Fuller | July 26, 2017 4:06 p.m. ET
Image credit: Toll gate, Sydney Harbour Bridge (1932), State Library of New South Wales, Wikimedia Commons
Automation is threatening one of the most personal businesses in personal finance: advice.
Over the past decade, financial advisers in brokerage houses and independent firms have amassed trillions in assets helping individuals shape investment portfolios and hammer out financial plans. They earn around 1% of these assets in annual fees, a cost advisers say is deserved because they understand clients’ particular situations and can provide assurance when markets fall.
In the latest test of the reach of technology, a new breed of competitors — including Betterment LLC and Wealthfront Inc. but also initiatives from established firms such as Vanguard — is contending even the most personal financial advice can be delivered online, over the phone or by videoconferencing, with fees as low as zero. The goal is to provide good-enough quality at a much lower price.
“It’s always been questionable whether or not advisers were earning our money at 1% and up,” said Paul Auslander, director of financial planning at ProVise Management Group in Clearwater, Fla., who says potential clients now compare him with less expensive alternatives. “The spread’s got to narrow.”
The shift has big implications for financial firms that count on advice as a source of stable profits, as well as for rivals trying to build new businesses at lower prices. It also could mean millions in annual savings for consumers and could expand the overall market for advice.
Competitors across the spectrum agree the demand is there. Advice “is big and growing — it’s what clients are looking for,” said Roger Hobby, executive vice president of private wealth management at Fidelity Investments.
The hunger for help marks a shift from the 1990s, when do-it-yourself investing was in vogue. Back then, the adoption of 401(k) plans moved responsibility for investment choices to company employees just as one of the biggest bull markets in history was boosting individuals’ confidence in their investing prowess. Meanwhile, pioneering online brokerage firms made trading inexpensive and convenient.
After internet stocks collapsed in 2000, along with the broader stock market eight years later, many individuals sought help. In the past decade, baby boomers started to retire and wanted technical guidance on drawing down their assets.
The advice industry expanded with the demand. Besides managing people’s investment portfolios — handling the trades, not merely suggesting them — some financial advisers also provide help with budgets or tax and estate planning.
The number of advisory firms grew to almost 3,900 in 2017, up from fewer than 750 in 2002, according to a Wall Street Journal analysis of Securities and Exchange Commission data. This universe of firms handles at least $100 million in assets each and provides both investment management and financial planning to individuals.
As of March 2017, such firms collectively had $5.5 trillion in assets on which they made investment decisions, the Journal’s analysis found. That is about six times as much as in 2002.
Throughout this period, advice fees have largely held steady — typically 1% of assets, with a potential discount for big accounts. One reason the standard held is many clients value aspects of advice that can’t always be measured or easily compared.
C. Lansdowne Hunt, 72, of Burke, Va., said he became more price-conscious after his portfolio fell 31% in the late-2008 stock-market meltdown. So in 2012, he switched to a less expensive adviser, and this year, asked for a discount on its 0.9% fee.
After being rebuffed, Mr. Hunt shopped for a new adviser for his $1.3 million portfolio at firms including Charles Schwab Corp., TD Ameritrade Inc. and Edward Jones. The former Naval officer and defense-contractor employee concluded his current Virginia advisory firm offers services, such as tax-sensitive investing and stock picking, that might be hard to replicate for a lower cost.
“I couldn’t get the exact twin,” he said.
Many firms are wagering that other customers will take less, for less.
About two years ago, Vanguard Group, known for serving do-it-yourselfers, started undercutting the financial-adviser industry with an annual advice fee of 0.3%.
Assets in its service, which combines recommendations from computer-driven algorithms with phone, video and email consultations with human advisers, grew to about $35 billion in the first year and to $83 billion by end of last month, according to the firm.
Joe McDonald of Titus, Ala., was an early customer. Long a do-it-yourself investor, he decided he needed an adviser after making an ill-timed move into an all-cash portfolio after Barack Obama’s 2008 election.
“I pulled out and stayed in cash until 2014, which was a terrible mistake,” said the 74-year-old retired electrical engineer. “I found I didn’t really have the discipline to stick with my own plan.”
He thought about hiring a traditional adviser in Florida who charges 1% of assets under management. His wife wasn’t comfortable entrusting money with someone she didn’t know, he said.
Mr. McDonald said he first invested in a mutual fund from Vanguard in 1983. He liked its 0.3% fee on an account with advice, and moved his roughly $500,000 in retirement accounts there.
“Expenses don’t mean a whole lot if you are making 10% a year,” Mr. McDonald said, ”but if you are making 2% or 3% a year, they are a real big deal.”
At Schwab, assets handled by financial advisers, including those at independent firms that use Schwab’s services, now account for more than half of the firm’s total assets. In recent years, the discount brokerage firm has added a range of options for those seeking advice, including a “robo” service introduced in 2015 that uses algorithms to build and monitor portfolios.
At Fidelity, assets handled with financial advice, either from the firm or from independent advisers who use its services, have nearly doubled over five years.
Part of the shift is generational, as younger adults appear to trust technology more than what they see as salesmanship. “Kids are saying to their parents, ‘Why the hell are you paying so much to your adviser? Is it worth 1% a year to have somebody to play golf with?’ ” said Joe Duran, chief executive of United Capital Financial Advisers LLC, an investment-management and financial-planning firm that also provides services to advisers.
Independent robo advisers that target younger customers — with fees as low as zero for the smallest accounts — have enjoyed hefty growth. Betterment and Wealthfront say they manage $9.7 billion and $7.1 billion in assets, respectively, up from $5.1 billion and $3.5 billion a year ago.
Morgan Stanley, UBS Group AG, Wells Fargo & Co. and Bank of AmericaCorp.’s Merrill Lynch, known for providing full-frills service at top rates, are testing or have already launched automated-advice ventures that charge less than their standard fees. The goal is to keep fee-conscious and lower-balance customers.
Some dealmakers are buying up traditional financial advisers with an eye toward consolidating and cutting costs, saying the industry has too many firms with outmoded technology and high overhead. The first half of 2017 was the most active yet for mergers and acquisitions among financial advisers, according to consulting and investment-banking firm DeVoe & Co.
The myriad pressures have traditional financial advisers investing in timesaving technology to cut costs. Some are passing along part of the savings to clients through fee reductions, while others are adding services to justify maintaining their fees. According to a survey from research firm Cerulli Associates, 79% of executives at advisory firms expect their fees to fall within the next five years.
Ann Gugle, a principal at Alpha Financial Advisors in Charlotte, N.C., said her firm recently cut its annual fee on assets of over $5 million to 0.125% from 0.25%. “If you do the math, you realize your practice will be worth significantly more if you’re smart about aligning your pricing with the value you deliver,” said Ms. Gugle. “If not, you’re going to be mincemeat.”
Robert Schmansky, a solo practitioner in Livonia, Mich., dropped his advisory fee to 0.85% from 1% earlier this year.
Until recently, Mr. Schmansky said, he has mainly marketed himself as a fiduciary — someone committed to working in the client’s best interests. Now he finds himself in direct competition with Vanguard, Schwab and others that also call themselves fiduciaries. “My key marketing distinction is being eroded by these firms in some ways.”
He said he works with a lot of younger investors, and “when I tell them my fee is 1%, they know immediately that Betterment costs less.”
Of all the initiatives, Vanguard’s is widely cited as the most threatening to the status quo. The firm’s size, brand recognition and aggressive pricing will create a challenge unlike anything independent advisers have seen before, said Michael Kitces, director of wealth management at Pinnacle Advisory Group Inc. in Columbia, Md. — much as Vanguard’s index funds have wreaked havoc on the traditional mutual-fund business.
Vanguard’s Personal Advisor Services (minimum investment: $50,000), has gained traction because customers want it, said Karin Risi, head of the firm’s retail investor group: “They didn’t just want to invest in a fund with us — they were saying they needed more help.”
So far, only about 10% of assets in the program comes from clients new to the firm. Advisers and industry analysts say it is only a matter of time before the service starts poaching more clients from competitors.
Vanguard has devoted about 500 financial advisers to its venture, said Ms. Risi. She expects the firm to hire roughly 100 advisers annually for the next several years. Clients with more than $500,000 get a dedicated adviser, who is a certified financial planner; those with less interact with rotating advisers drawn from a pool, some not yet CFPs.
Many traditional advisers suggest that partially automated services such as Vanguard’s provide basic, cookie-cutter advice inferior to what an experienced financial planner can provide. Ms. Risi said the firm’s advisers go through “pretty impressive training.”
Elyse Foster, an adviser in Boulder, Colo., has taken note. Three years ago, she cut financial-planning fees by an average of 40% at her firm, Harbor Financial Group Inc. It also has invested in technology that allows clients to open accounts online, automatically rebalances portfolios to a target mix of stocks and bonds, and shares software so clients can simulate their own planning scenarios.
“We are aware consumers are more price-conscious and are lowering our fees proactively,” said Ms. Foster. “We are trying to stay ahead of the industry.”
Source: The Wall Street Journal, https://www.wsj.com/articles/talk-is-cheap-automation-takes-aim-at-financial-advisersand-their-fees-1501099600
For further reading:
Definitions of FINANCIAL ADVISOR, INDIVIDUAL INVESTOR, INVEST, and PORTFOLIO in Jason Zweig, The Devil’s Financial Dictionary
Chapter Ten, “The Investor and His Advisers,” in The Intelligent Investor