Financial Advisor Fees Will Continue To Go Down
The traditional financial advisor compensation model may be slowly but surely meeting its demise. The pressure started years ago with low-cost index funds, then ETFs, target date retirement funds, and more recently, low-cost robo-advisors. Charles Schwab has struck the latest blow.
Before I mention what Schwab has done, I’ll recap how the traditional financial advisor compensation model works. The client pays an “asset under management” fee, typically in the range of 1% depending on the client’s assets. The client often incurs additional investment expenses that can be another 1/2% due to the investment selections of the advisor. While the fee sounds small — and it is well hidden — this is expensive financial advice. This is especially true with the fixed income portion of an investor’s portfolio, in which after-tax investment returns are ~2.5%. With these fees, the advisor is capturing half of the client’s compounded growth while taking none of the risk.
Schwab recently announced the “Schwab Intelligent Portfolios Premium” and it should put the fear of God into traditional financial advisors. For a one-time fee of $300 and an on-going fee of $30 per month, they offer unlimited personalized guidance from a certified financial planner. In addition, they will invest your funds in low-cost ETFs in which they charge you no commission. You can read more about their service here.
With a $1 million portfolio, Schwab could save you ~$15,000 per year, compared to a traditional advisor. This is enough for any client to take notice. The obvious question is whether the fee savings would be lost by lower returns? I don’t see why that would be the case as there is no reason to believe that higher cost investment advice delivers higher investment returns. As John Bogle has put it, “In investing, you get what you don’t pay for.”
This is a good opportunity to get personalized financial guidance at an affordable price. Expect there to be continued pressure for lower fees in the financial advisor marketplace. To read more on the role and value of financial advisors, click here.