Originally posted on Advisor Perspectives, April 24, 2017
A recently released report from Russell Investments assessed the value of an advisor “to be approximately 4.08% a year.” It noted that this value “materially exceeds” the 1% fee advisors typically charge for their services.
This should have been encouraging news to beleaguered advisors coping with a rapidly changing competitive environment.
It had the opposite effect on me.
The Russell study reached the 4.08% number by calculating the value of annual rebalancing, correcting “behavioral mistakes individual investors typically make,” the value of basic investment advice, the value of planning costs and ancillary services and the value of tax-aware planning and investing.
Assuming the accuracy of the items Russell studied, here’s what’s missing:
How much would it cost an investor to obtain these benefits elsewhere?
On the hypothetical $500,000 portfolio, the Russell study attributes a value of 0.20% to annual rebalancing.
The study ignores the fact that some investments don’t require any rebalancing. Target-date funds are one example. Balanced funds, like Vanguard’s LifeStrategy Funds, automatically rebalance. These funds are suitable for many investors.
Investors might also consider rebalancing themselves, at no cost. The process of rebalancing funds is very simple and should take no more than 30 minutes or so a year.
Investors who need the services of an advisor have many options for rebalancing that don’t involve paying 1% annually. Betterment charges a fee 0.25% annually, which includes regular automatic portfolio rebalancing, among many other services.
The Russell study placed a value of 2% annually on controlling investor behavior. It referenced data indicating that investors tend to buy high and sell low.
But investors can obtain this counseling from a range of low-cost providers, including robo-advisors, Vanguard and Schwab.
Vanguard’s Personal Advisor service will provide access to a qualified advisor who will recommend a portfolio of low-cost index funds, serve as an investing coach and minimize taxes for a total fee of 0.30%.
While controlling investor behavior may well be worth 2% annually, if investors can get this benefit (and a lot more) for 0.30% from a world-class brand, why would they pay an advisor 1%?
There’s no doubt advisors add significant value by providing and updating custom financial plans, having regular portfolio reviews and doing tax planning. The Russell study placed a value of 0.75% annually for planning costs and ancillary services and 0.80% annually for tax-aware planning/investing.
Some investors may decide the lower cost services from hybrid robo-advisors like Vanguard, or the premium services offered by Betterment and others, can satisfy these needs at a far lower cost.
Betterment’s new premium service charges an annual fee of 0.50%. It requires a minimum balance of $250,000. Investors using this service get unlimited calls with CFP professionals and licensed financial experts, and additional account monitoring.
Investors can also obtain this advice from a fee-only financial planner. Many are available from the Garrett Planning Network. Some of the members of this network charge flat or hourly fees and sell no financial products.
For example, Main Street Financial Planning offers holistic financial planning, cash flow and saving assessments, investment portfolio analysis and detailed recommendations, insurance coverage review, savings requirements for goals, tax savings recommendations and estate plan review, including family and charitable gifting ideas. It assists with the implementation of its recommendations, provides free questions for 12 months and a six-month check-up session.
For a starting or growing family, the one-time, total cost of these services is $3,600. Annual check-ups are $1,800, but a 1% fee on a $500,000 portfolio is $5,000 annually.
Growth rates for advisory firms are slowing. Referrals are no longer the primary drivers of growth. Some question whether “there are very many ‘unattached’ clients to be referred in the first place.”
Competition for new business has never been greater. Advisors will continue to be under fee pressure. Many of the services offered by traditional advisors are now available at a lower price from others. The shift from active to passive investments has lowered the perception of the value clients place on investment advice, which has become more of a commodity.
No one can predict what the advisory business will look like over the next decade. Firms that realistically assess these challenges, and develop a carefully crafted plan to confront them will be the ones to survive and prosper.