The era of investment advisers collecting a sweet 1% fee or more from your investments every year may be coming to an end. Several large companies are now offering low-fee portfolio management and financial planning services to their clients. Competition is stiff, and a new fee war seems to have erupted.
A growing number of large investment firms are now charging a few hundred dollars per year for services that traditionally cost several thousand dollars through an independent adviser. These services include unlimited financial planning and portfolio management. Betterment, Charles Schwab, and Vanguard all introduced low-cost programs that keep investor’s expenses low, and they’re getting lower.
Betterment recently began offering à-la-carte financial planning services that cost only a few hundred dollars per project. The company already has a low 0.25% portfolio management fee. This new service is in line with Betterment’s fee democratisation values. If you prefer an all-inclusive fee, Betterment offers unlimited planning and portfolio management for 0.40% on a $100,000 minimum account. The financial planning side considers all your assets regardless of where they’re held. That means you can get advice on all your money for just $400 per year.
Not to be outdone, in March this year, Charles Schwab announced their new Schwab Intelligent Portfolios service, which offers portfolio management and unlimited financial planning for only $30 per month, plus a $300 set-up fee. That's $660 the first year, and $360 per year after. This is the least expensive offering so far.
Let's not forget the Vanguard Personal Advisor Program that started the low-cost trend three years ago. They're still at 0.3% per year of your account size for unlimited planning and portfolio management, but CEO Tim Buckley has publicly stated he intends to get Vanguard's adviser fee down to "index fund levels”.
Charging a 1% fee has been a sacred cow of many advisers. Those who charge this amount typically claim to “add value” to their a client relationship. The question is this, how much value can they add when their services cost so much compared to the big firms? Assume a client has one million in a portfolio, the 1% adviser would charge $10,000 per year for financial planning and portfolio management, Betterment's cost is $4,000 per year, Vanguard’s fee is $3,000 per year, and Schwab’s fee of $660 the first year and $360 every year after that.
The 1% adviser is charging at least $6,000 more per year than their closest competitor, and over $9,000 per year more than Schwab. I don’t know what “value added” the 1% adviser could be bringing to the table that makes up this extra cost. It’s a lot of extra money coming out of a retiree’s account to pay for something that can’t be quantified in real dollars, except perhaps the cost of the annual client appreciation dinner and a thank you card during the holiday season.
Fees have dropped everywhere in the investment industry. Commission costs at discount brokerage firms have dropped to a few dollars per trade, index funds expense ratios have reached next to nothing, and custodial charges for IRA accounts have disappeared. Large firms are increasingly eyeing the last bastion of gluttony — the fat 1% fee that many independent advisers charge. It's next on the chopping block.
Based in Texas, RICK FERRI is one of the most respected financial advisers in America. He recently started his own practice, Ferri Investment Solutions. He has written several books and is a regular contributor to our site blog, The Evidence-Based Investor.