The subscription-style scheme for financial planning is expected to 'send a shockwave through the marketplace'
Among the different fee models that financial advisors could follow, asset-based compensation has been the go-to for many who seek to align their interests with those of clients. But that model overlooks an important market need — one that a discount broker in the US aims to address.
“[M]any traditional financial advisers charge flat annual fees based on the size of each client’s portfolio,” wrote Wall Street Journal columnist Jason Zweig. “Often, they don’t bill explicitly for financial planning. As a result, they tend to shun potential clients with small accounts—the very people who often most need good financial planning.”
Recognizing that reality, US-based discount broker and investment-advisory firm Charles Schwab launched a new program on March 28 called Schwab Intelligent Portfolios Premium. Investors are asked to pay an initial US$300 fee, after which the service will cost US$30 per month. That includes investment portfolio management — with no annual fee tacked on — as well as unlimited access to financial planners and online tools to help set objectives, define risks, and lay paths toward crucial goals such as home ownership and debt management.
A look under the hood of the service’s investment-management machine reveals minor costs to clients. The portfolios assembled by the service will include ETFs with annual expenses that average roughly between 0.08% and 0.19%; about 60% of those (by assets) are run by Schwab.
The firm will also keep a required minimum amount of anywhere from 6% to as much as 30% of the portfolios in cash, which will automatically be deposited at its affiliated bank that offers 0.7% in interest. Zweig wrote that a recommendation from Schwab to keep 10% of a US$250,000 account in cash would net the client US$175 in a year; if that amount were instead placed in money-market funds, which have an average interest rate of 2.28% according to Crane Data, would earn the client US$570.
“The difference between what Schwab will pay and what you could have earned by investing the cash elsewhere is about 0.16% of your total account value at today’s rates,” he said. “That expense, not easy for investors to detect, is nevertheless real—an inescapable part of what the service will cost.”
Schwab’s new pricing model, which explicitly spells out a service for a fee, should “send a shock wave through the marketplace,” he added. Many advisors have oriented the public to think of financial advice as an “add-on” service by charging an investment-management fee and appearing to give the financial planning away for free. But in reality, investment management has become commoditized as a service, and the counsel of a good planner is what adds significantly to one’s net worth in the long term.
While Schwab isn’t the first firm to offer financial planning by subscription, it does signal a growing shift. “These fee-for-service models are permeating the industry very rapidly and deeply,” said Michael Kitces, financial advisor and co-founder of XY Planning Network. XYPN supports nearly 900 advisors offering financial planning by subscription fees, and is reportedly seeing its network grow with 39 new advisors signed up monthly.
