How you pay for financial advice can be as important as how much you pay.
On March 28, Charles Schwab Corp., the discount broker and investment-advisory firm, launched what it calls Schwab Intelligent Portfolios Premium. After an initial $300 fee, the service costs $30 per month.
For that, Schwab will manage investment portfolios with no annoying annual fee slapped on top—and will provide unlimited access to financial planners and online tools that can help clients set objectives, define risks, minimize taxes, save for college, finance a home, manage debt and so on.
Paying for financial planning by monthly subscription is a radical break from business as usual. At a similar service Schwab previously offered, clients paid 0.28% of investment assets annually. (Some small accounts will continue to pay that rate, which is cheaper on balances below about $130,000.)
That 0.28% rate cost $280 in annual fees on a $100,000 portfolio and $700 on a $250,000 account. Now, after the first year, monthly subscription fees will total $360 annually—regardless of how much money you have or how heavily you use the program’s services.
Just as Schwab did until now, many traditional financial advisers charge flat annual fees based on the size of each client’s portfolio. 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.
The advice and judgment of a good financial planner can do wonders for your net worth.
Meanwhile, advisers who charge for their services through an investment-management fee while appearing to give financial planning away have trained the public to believe investing is arcane and expensive, while financial planning is mundane and unimportant.
The opposite is closer to the truth: Investment management is a commodity whose market price has dropped close to zero, whereas the advice and judgment of a good financial planner can do wonders for your net worth.
Schwab’s move should send a shock wave through the marketplace: Financial planning is the service that is worth paying more for, while it’s investment management that ought to be close to free.
Mind you, Schwab’s clients won’t pay absolute zero for investment management.
The service will assemble portfolios of exchange-traded funds with annual expenses averaging roughly between 0.08% and 0.19%. About 60% (by assets) are run by Schwab, which thus will pocket the majority of those fees.
Schwab will keep between a required minimum of 6% to as much as 30% of the portfolios in cash, automatically depositing that at its affiliated bank, currently paying 0.7% in interest. If Schwab’s service recommends that you keep 10% of your $250,000 account in cash, you’d earn $175 in a year. If instead you received the 2.28% average interest rate on money-market funds, according to Crane Data, you would earn $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. That expense, not easy for investors to detect, is nevertheless real—an inescapable part of what the service will cost.
But, to its credit, Schwab isn’t slapping any extra management fee on top of these expenses—a toll that most other firms still seem to regard as their birthright.
Schwab has initially assigned a staff of 35 financial planners to the program. Is it competing directly against the thousands of independent financial advisers it often refers clients to?
“We’re using technology to provide planning at scale and reduce costs, often to investors who’ve not had access before,” says Cynthia Loh, vice president for digital advice and innovation at Schwab.
Independent advisers “continue to be one important element in the range of advisory solutions we offer clients,” she says. “They are the best solution for investors who have more complex, specialized needs and prefer an ongoing relationship, often with in-person interactions.”
Think of any field worthy of being called a profession, and its practitioners tend to charge clients on a fee-for-service basis. They base their billing on what they did for you, not on how much money you have.
Your lawyer won’t take 1% of your estate for drafting all your legal documents; he bills by the hour or a flat one-time fee. Your doctor doesn’t take 1% of your net worth even for curing you of a potentially fatal disease; she charges you for the procedure.
Financial advisers, too, should charge for advice directly—instead of indirectly under the cover of investment-management fees.
Schwab isn’t the first firm to offer financial planning by subscription, and it probably won’t be the last. “These fee-for-service models are permeating the industry very rapidly and deeply,” says Michael Kitces, a financial adviser and co-founder of XY Planning Network, which supports nearly 900 advisers offering financial planning by subscription fees. He says XYPN is signing up about 30 new advisers per month.
“This ocean is so large and blue and deep right now,” says Mr. Kitces, “there is plenty of room for everybody.”
If Americans are to get the financial advice they need, more advisers need to change how they charge their fees.
Write to Jason Zweig at email@example.com