New models are challenging long-held views on the value of personal advice
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There was a time when one could say a 1% fee on assets is very reasonable for personalized portfolios and financial plans. But now technological advances are undermining that argument.
Both upstart and established advisory firms are starting ventures that deliver financial advice remotely through online and phone-based channels for rock-bottom fees, according to the Wall Street Journal.
Financial advice, which runs the gamut from portfolio management to tax and estate planning, has exploded since the early 2000s. Analysing data from the US Securities and Exchange Commission, the Journal found an increase in advisory firms from fewer than 750 in 2002 to nearly 3,900 in 2017, with each firm now handling at least US$100 million in assets.
The Journal’s analysis also found the industry collectively had US$5.5 trillion in assets as of March — around six times what it held in 2002. Meanwhile, advice fees have generally not changed substantially through the years, mainly because many clients put a premium on aspects of advice that aren’t quantifiable or easy to make comparisons for.
The move toward charging lower fees for adequate service started around two years ago, when Vanguard Group started offering an annual advice fee of 0.3%. The firm’s service, which puts together remote consultations with human advisors and algorithm-generated investment recommendations, had assets of around US$83 billion by the end of June.
In 2015, Charles Schwab also launched its own robo service, which builds and tracks portfolios using algorithms. Premium advisory firms like Morgan Stanley, Wells Fargo, and Merrill Lynch are also testing or have already debuted automatic-advice businesses with fees lower than their standard rates.
Offering fees as low as zero for the smallest accounts, newcomers Betterment and Wealthfront say they have AUMs of US$9.7 billion and US$7.1 billion, respectively; last year, they had US$5.1 billion and $3.5 billion.
Traditional financial advisors are also getting swept up in acquisitions aimed at consolidation and cost-cutting. Citing the consulting and investment-banking firm DeVoe and Co., the Journal said the first half of 2017 saw the most merger and acquisition activity yet among financial advisors. Firms investing in time-saving technologies are either passing savings to clients or adding services to justify high fees.
Today, Vanguard has around 500 financial advisors working in its Personal Advisor Services business. Those with more than $500,000 are assigned a dedicated advisor who’s also a certified financial planner (CFP); those with get to consult advisors drawn from a pool, some of whom are not yet CFPs.
“If you do the math, you realize your practice will be worth significantly more if you’re smart about aligning your pricing with the value you deliver,” Ann Gugle, a principal at US-based Alpha Financial Advisors, told the Journal. “If not, you’re going to be mincemeat.”
For more of Wealth Professional's latest industry news, click here.
Related stories:
How advisors can start to reshape their industry
How advisors can excel in the robo revolution
Both upstart and established advisory firms are starting ventures that deliver financial advice remotely through online and phone-based channels for rock-bottom fees, according to the Wall Street Journal.
Financial advice, which runs the gamut from portfolio management to tax and estate planning, has exploded since the early 2000s. Analysing data from the US Securities and Exchange Commission, the Journal found an increase in advisory firms from fewer than 750 in 2002 to nearly 3,900 in 2017, with each firm now handling at least US$100 million in assets.
The Journal’s analysis also found the industry collectively had US$5.5 trillion in assets as of March — around six times what it held in 2002. Meanwhile, advice fees have generally not changed substantially through the years, mainly because many clients put a premium on aspects of advice that aren’t quantifiable or easy to make comparisons for.
The move toward charging lower fees for adequate service started around two years ago, when Vanguard Group started offering an annual advice fee of 0.3%. The firm’s service, which puts together remote consultations with human advisors and algorithm-generated investment recommendations, had assets of around US$83 billion by the end of June.
In 2015, Charles Schwab also launched its own robo service, which builds and tracks portfolios using algorithms. Premium advisory firms like Morgan Stanley, Wells Fargo, and Merrill Lynch are also testing or have already debuted automatic-advice businesses with fees lower than their standard rates.
Offering fees as low as zero for the smallest accounts, newcomers Betterment and Wealthfront say they have AUMs of US$9.7 billion and US$7.1 billion, respectively; last year, they had US$5.1 billion and $3.5 billion.
Traditional financial advisors are also getting swept up in acquisitions aimed at consolidation and cost-cutting. Citing the consulting and investment-banking firm DeVoe and Co., the Journal said the first half of 2017 saw the most merger and acquisition activity yet among financial advisors. Firms investing in time-saving technologies are either passing savings to clients or adding services to justify high fees.
Today, Vanguard has around 500 financial advisors working in its Personal Advisor Services business. Those with more than $500,000 are assigned a dedicated advisor who’s also a certified financial planner (CFP); those with get to consult advisors drawn from a pool, some of whom are not yet CFPs.
“If you do the math, you realize your practice will be worth significantly more if you’re smart about aligning your pricing with the value you deliver,” Ann Gugle, a principal at US-based Alpha Financial Advisors, told the Journal. “If not, you’re going to be mincemeat.”
For more of Wealth Professional's latest industry news, click here.
Related stories:
How advisors can start to reshape their industry
How advisors can excel in the robo revolution
