Originally published on Evidence Based Advisor Marketing, August 6, 2018
I understand it’s a myth that cats have nine lives. In your case, as an advisor, it may be your reality.
You not only survived the advent of robo-advisors, you may be benefitting from advances in technology pioneered by them.
Don’t rest on your laurels quite yet. The big boys (Schwab and Vanguard, among others) entered the robo space, with sharply reduced fees, and an offering that’s difficult for many investors to resist: A combination of advanced technology and the services of qualified advisors, offered at a fraction of what most of you are charging.
If you’re like most of your competitors, you’re still charging a fee based on assets under management. Here’s where I see trouble on the horizon.
I don’t believe this fee model will survive the next decade, if that. Investors can invest on their own, using low management fee target date funds or core funds, and not pay any advisory fee. Or they can use a hybrid robo-advisor and pay fees far lower than what you are charging.
An increasing number of advisors are charging a retainer or a flat fee based on complexity.
There’s evidence these developments are taking a toll on growth and per-advisor revenues.
Denial isn’t a plan. You should consider adjusting your fee model to anticipate additional pressure on fees.
Investment alternatives abound
More than a decade ago, when I was an advisor, it was enough for me to differentiate myself by giving my clients access to Dimensional funds.
The popularity and availability of ETFs changed that. In 2017, inflows for ETFs topped $464 billion.
Evidence-based advisors found a reprieve by offering factor-based investing. It takes expertise to put together a risk-adjusted portfolio that takes into account factors academics have determined account for a significant portion of returns over time.
Now even that narrow differentiator is being eliminated. Vanguard launched a number of factor-based funds that focus on the most common factors. It also offers a multifactor ETF and a multi-factor mutual fund. It’s multi-factor ETF has an expense ratio of only 0.18%
Now the coup de gras.
It’s challenging enough to compete with Vanguard, which has over $5 trillion in assets.
Goldman Sachs has entered the fray. It has launched the Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC). It’s a multi-factor fund, with an expense ratio of only 0.09%. It screens for the most common factors (value, momentum, quality and low volatility). It’s extremely tax efficient.
Here’s the bottom line.
With modest effort, investors can put together a portfolio that rivals yours in sophistication, without paying any advisory fee.
That leaves you to justify your value by referencing your non-portfolio activities, like comprehensive financial planning and coordination with accountants and estate planning lawyers.
Those activities definitely have a value. But here’s my concern for you.
Are they really worth tens of thousands and even hundreds of thousands of dollars of fees yielded by your bundled fee model?
Do you believe technology won’t impact those areas next?
Resource of the week
This article in Bloomberg discusses Goldman’s factor fund. It refers to its new ETF as “perfectly calibrated to eliminate human managers by exploiting the growing world of fee-based advisors.”