Posted by on Sep 22, 2014 in Blog, Columns |

By Jason Zweig | 4:26 pm ET  Sept. 19, 2014
Image Credit: Christophe Vorlet

In a world in which the expected long-term return of a stock portfolio after taxes and inflation is 3% to 4% a year at best, financial advisers still typically charge 1% a year for their services.

Why, when you take all the risk, should your adviser take up to one-third of all the reward?

It doesn’t have to be that way, and the death knell for such high fees may already be ringing. Vanguard Group, the firm that turned the mutual-fund industry upside-down and drove asset-management fees into the ground, is aiming to bring the same kind of disruptive change to the business of financial advice.

Vanguard manages approximately $3 trillion in mutual funds and exchange-traded funds for a pittance of 0.19% in average annual expenses. The firm’s Personal Advisor Services unit, which provides investment management and financial planning for a flat 0.3% annual fee for most clients, has $3.6 billion in assets, up from just $755 million at the end of 2013.

Vanguard is joining a fast-growing trend toward delivering dirt-cheap financial advice online. So-called robo-advisers such as Betterment and Wealthfront use computer models to provide automated portfolio management for fees of around 0.25% of total assets, or $25 per $10,000 invested.

In July, Charles Schwab Corp. Chief Executive Walter Bettinger told analysts that the giant discount broker is “fast at work on what we believe will be a groundbreaking…online advisory solution.” Fidelity Investments Executive Vice President John Sweeney says the firm offers “a full spectrum” of financial planning, largely online, for as little as 0.5% annually.

At Vanguard, the more money you have, the more financial guidance you will get from the firm’s advisers. Consider Greg Hardwick. The 57-year-old is a human-resources director at a nonprofit in the Phoenix area; he and his wife have a seven-figure account at Vanguard.

“I’m really cheap,” says Mr. Hardwick. “I hate paying fees.” He says Vanguard’s financial planners have advised his family, now at the 0.3% annual fee, on long-term-care insurance, disability coverage, trust accounts and the tax treatment of retirement plans. “They’ve helped us tremendously,” he says.

At even higher levels—if your assets exceed $5 million—Vanguard will send your adviser to meet with you face-to-face as needed, says Karin Risi, who runs the firm’s retail advisory services, which include the new program. Such ultrawealthy clients will pay less than 0.3%, she says.

To be sure, if you have only $50,000 to $500,000, Vanguard won’t provide a butler to be at your side for every financial decision you make. Much of the advice will be generated automatically by the firm’s computers and delivered online, based on information you provide about your income, assets, financial objectives and appetite for risk. One of the Vanguard program’s financial advisers will then talk to you by phone or video conference to tweak your portfolio and your financial plan as needed.

Nor, at less than $500,000 in assets, will you get much of the valuable advice on insurance, mortgages, budgeting and the like that financial planners elsewhere may provide. And if the market crashes, no one from Vanguard will plop down on your living-room couch to make you feel better.

Furthermore, says Daniel P. Wiener, chief executive of Adviser Investments, a firm in Newton, Mass., that manages $3.2 billion, “I don’t want my plumber to do my carpentry or my lawyer to do my accounting, and maybe you don’t want your investment manager to do your financial planning.”

On the other hand, Vanguard charges so much less than the typical financial-planning firm, you might not object.

The fund giant is pushing hard into financial planning. It ranked sixth among all firms in the U.S. by the number of employees who took this June’s exam to become certified financial planners, according to Joe Maugeri, head of corporate relations at the CFP Board of Standards, which awards the designation. Ms. Risi says Vanguard expects to double the number of CFPs working in the program to 500 from 250 over the next couple of years.

Though Vanguard previously offered financial planning to its wealthiest clients, virtually all the assets at Personal Advisor Services are new money rather than transfers from that program, says Ms. Risi. Earlier clients, who paid 0.7%, will soon be switched to the 0.3% rate, she says.

Some advisers see the new service as a way to unload less-wealthy investors who aren’t worth their time, says Ms. Risi. Some financial planners who already use Vanguard funds “have even been coming to us and saying, ‘How can I refer my lower-end clients to you?’” she says.

Vanguard’s rock-bottom fee, says Ray Ferrara, chief executive of ProVise Management Group, an advisory firm in Clearwater, Fla., “absolutely should cause [financial-planning firms] to justify to the client the extra expense of what they’re doing.” His firm charges a 1% annual fee on accounts of up to $1 million and less on larger accounts.

Says Rick Ferri, founder of Portfolio Solutions, a financial adviser in Troy, Mich.: “I’ve always said the last bastion of gluttony in the financial business is the advisory fee.” His firm charges a maximum of 0.37% annually. “The way people pay for advice,” he adds, “will change dramatically over the next 10 years.”

You might want more human contact than Vanguard’s new service can provide, especially if you need complex financial planning or you tend to panic in bad markets—in which case paying a higher fee elsewhere could still make sense.

But at the very least, you should ask your adviser to justify why his services are so much more valuable than what an industry leader has begun to provide.


Source: The Wall Street Journal