Posted by on Mar 10, 2014 in Columns | 0 comments

By Jason Zweig | 6:55 pm ET  Mar. 7, 2014
Image Credit: Christophe Vorlet


Professional portfolio management has long cost too much. If a new company has its way, it could be free.

This past week, WiseBanyan, an online-only investment adviser, publicly launched a service that builds and manages diversified portfolios of exchange-traded funds for nothing. There is no minimum account size; nor is there any fee to sign up, to buy the funds or to hold them (other than the underlying expenses of the funds, averaging less than 0.14% annually).

“We’re attempting to replicate what good financial advisers do for large clients in an automated, low-fee fashion for small clients,” says co-founder Herbert Moore, a former institutional trader who has run an affiliated advisory firm since 2009. It’s much too early to say whether WiseBanyan will succeed; so far, it has signed up hundreds of clients, says Mr. Moore. The company ultimately hopes to make money by charging fees for additional services.

But the new venture poses a fundamental question to every investor: If money can be managed this cheaply, am I getting my money’s worth from my financial adviser?

Brokers and financial advisers generally ask investors a few questions about their age, income, assets, goals and attitudes toward risk. Then the advisers create an “asset allocation,” or mix of stocks, bonds, cash and other investments. Finally, they recommend specific holdings—typically mutual funds or ETFs—to achieve that allocation.

That will cost you, on average, about 1% of your assets every year, even though the process is often highly mechanical and a computer can do it for nothing, as WiseBanyan shows with its “algorithmic” method of determining which portfolios to recommend.

Oddly, many “financial advisers” barely give advice at all. Scott Smith, a director at Cerulli Associates, a research firm based in Boston, estimates that 9% of roughly 300,000 financial advisers in the U.S. do nothing but manage portfolios; only about 26% provide comprehensive advice on financial planning.

Many of these advisers are itching to beat the market by picking individual securities or by “tactically” whizzing in and out of stocks. A few might succeed, but most don’t; overall, that hyperactivity lowers clients’ returns instead of raising them. So you pay a lot but often get only a little.

Meanwhile, the enormously valuable counsel that a good financial adviser can provide—how to manage the complexities of tax, estate and retirement planning, for example—usually comes at no additional cost.

“It’s absurd,” says James Miller of Woodward Financial Advisors, a firm in Chapel Hill, N.C. “Why should clients’ fees be based solely on the size of their investment portfolio when what they really want is financial-planning advice?”

Mr. Miller’s firm instead charges a flat minimum fee of $7,500 a year, regardless of portfolio size, that includes portfolio management and all financial-planning services.

“I can’t count how many phone calls, direct messages and blog comments I’ve been getting from younger advisers who say, ‘I don’t think our fee model makes any sense for our clients,’ ” says James Osborne of Bason Asset Management in Lakewood, Colo., another firm that assesses a flat annual fee regardless of account size. Bason charges a maximum of $4,500 a year. Bason’s and Woodward’s fees amount to a reasonable 0.45% to 0.75% on a $1 million portfolio—but are prohibitive for clients with smaller balances. Such annual retainers or hourly fees make up only about 3% of all advisers’ compensation, estimates Cerulli’s Mr. Smith.

So it’s no wonder that online-only investment management is booming, albeit off a small base.

Wealthfront, based in Palo Alto, Calif., has expanded from $100 million in assets in early 2013 to more than $730 million as of this past week, says Chief Executive Adam Nash. Betterment, a firm based in New York, has nearly $500 million in assets and expects to surpass $1 billion by year-end, says Chief Executive Jon Stein.

Wealthfront charges a flat 0.25% fee on accounts over $10,000 and nothing for smaller accounts; Betterment charges as little as 0.15%. Both companies build portfolios of ETFs, automatically adjusting them to maintain the desired exposure to assets and to minimize taxes, at no extra charge.

“This generation [of younger investors] has crossed an important threshold,” says Mr. Nash. “They’re ready to trust software with their money.”

Mr. Stein says financial-advisory firms are negotiating with Betterment to take over their clients’ portfolio management so the firms can instead devote their time to financial planning.

“Investment management can be more expertly done by an algorithm than by a human adviser,” says Mr. Stein. “But for many aspects of financial planning, it’s better to have a human.”

And that points toward the ultimate question: Is your adviser charging you a fair price and providing the services you want?

If you look in the “fees and compensation” section of your adviser’s Form ADV, a disclosure document mandated by the Securities and Exchange Commission, you might well find that the fixed fee you have been paying all these years is negotiable.

If it is, negotiate. If it isn’t, think hard about whether what your adviser is giving you is advice or just portfolio management that you could get cheaper from a machine.


Source: The Wall Street Journal