Should You Hire a Financial Manager? Human or Robot?
There’s nothing like a raging pandemic to bring home the reality that your mortality is not just a theoretical possibility. Not unlike the effect of knowing one will hang on the morrow, the current situation has motivated me to give some serious thought to what happens when I’m gone. While I’m quite comfortable managing our finances, my wife’s ability to find an excuse whenever I try to sit down and go over things makes me realize that she doesn’t share my zest for this financial stuff. So what would happen if I were no longer around to monitor our far-flung accounts, rebalance things periodically, and hunt for the best CD rates? I am fairly confident that she is set up for a comfortable retirement; still, someone needs to pay attention to income, spending, and investments; and to respond appropriately to new laws and big life changes. It doesn’t seem fair to dump this responsibility on one of the kids, so I decided to look into financial advisory services.
Financial advising – traditionally a service for the wealthy
Credit: The New Yorker
Traditionally, financial management has been a service offered mainly to the rich. People with large liquid assets had enough money to be able to afford such a “wealth management” service and to attract the attention of solicitous professional money managers. Managers typically were (and are) paid a percentage of assets (say 1 or 2% annually), or they received a cut from purchases made on the client’s behalf, or both. Unfortunately, such money managers often have a built-in conflict of interest, with an incentive to churn holdings or purchase “house brand” annuities or mutual funds. Not surprisingly, wealth managers have sometimes exposed their clients to unnecessary and inappropriate risks and achieved substandard performance. (A quick online search did not yield any studies on the performance of private wealth managers, but there are studies of the performance of professional mutual fund managers, who might be considered a reasonable analogue. Such studies (see this one, for example) show that 80 to 90% of professional fund managers consistently underperform their benchmarks over the last 3, 5, 10 and 15 year periods!)
To address the fox-in-the-henhouse problem, the Obama administration proposed a strengthening of regulations to require that all advisers providing advice on retirement planning – including brokers and annuity salespeople — act as “fiduciaries,” providing advice that’s in the best interest of the client. Unfortunately, this proposed rule was delayed by the Trump administration, and subsequently vacated by the Fifth Circuit Court of Appeals.
While the future of regulation to protect financial consumers is cloudy, it is still possible to find advisers who adhere to a fiduciary standard; most fee-only planners (who charge by the hour rather than making their money on transactions) are fiduciaries. Option 1, then, for my (financial management) replacement is to find a fee-only financial planner/manager whom I (and my wife!) trust and like (i.e., someone who listens well and understands our needs and desires, rather than attempting to tell us what we should be doing).
How do you find a suitable financial adviser? Going to those free steak dinners is not the best strategy; people providing freebies are generally selling something (in this case, usually annuities). This Kiplinger article gives some good advice on how to go about finding your financial helpmeet. First, think about what you need; I would be looking for someone who had the breadth to provide advice on topics beyond investments – including tax planning, retirement accounts, estate planning, and the sundry emergencies and surprises that life tends to throw at us. Locate promising candidates by asking friends, colleagues, or financial professionals you already know; and by perusing financial planner databases such as www.letsmakeaplan.org, www.napfa.org, or www.garrettplanningnetwork.com. Interview several promising candidates to find one who is a good fit for your needs and values. Don’t forget to check references.
Of course, you should understand exactly how a prospective adviser is compensated, and make sure your intended adviser is a fiduciary. How much does financial advice cost? Paying an adviser by the hour isn’t cheap (typically $100 to $400 per hour), but might be the best way to ensure that your financial advice is objective. At $200 per hour, 5 to 10 hours of advice a year would cost $1,000 to $2,000. Some fee-only planners work on retainer, which can vary but start at about $1,000 per year. If you’re offered advice for free, you can bet that the adviser expects to make money off you in some other way.
‘Robo’ and ‘hybrid’ services – bringing financial advising to the masses
Credit: Lucasfilms
In recent years, the world of financial advising and management for individuals has been revolutionized by, you guessed it, the Internet. Brokerage and mutual fund firms have raced to provide “robo advisers” that handle much of the traditional work of financial planning and management (such as creating a plan and rebalancing when assets get out of whack) with little or no need for human involvement. They ask you some questions about your age, goals, expected annual savings, and comfort with risk. Based on your responses, they propose a plan –typically a portfolio composed of low-cost ETFs or mutual funds, and projections as to how likely you are to meet your goals. If you say yes, they’ll convert your assets to the desired mix and take care of monitoring and rebalancing it periodically. Because much or all of the robo advising process is automated, this type of service can be offered for quite a bit less than the traditional 1 or 2% per year charged by traditional wealth managers.
Credit: Star Trek
Recognizing that some people are not comfortable dealing only with a computer, many firms also offer a higher-priced “hybrid” options, which give you access to people – financial planners and managers, sometimes including folks who can provide advice on taxes, estate planning, philanthropy and other topics that might fall outside a narrow definition of financial management.
Anyone who has agonized over rebalancing his or her portfolio as a result of the current bear market (Should I rebalance now? What if the market goes lower? I’ve probably already missed my chance. Maybe I should wait until things settle down — or sit tight till the end of the year…) might appreciate handing off this stressful task. I’m particularly intrigued by the hybrid options, since I know my wife would never be comfortable with a situation where there was no person to call with questions or concerns.
Below I review several robo and hybrid financial advisory services offered by reputable organizations. (Note: While I have read materials and reviews, I have not actually used these services myself, so do not speak from the voice of experience.)
Vanguard
Vanguard, the grand-daddy of low-cost index fund investing, offers two levels of financial management for those who would rather not do all the work themselves. Digital Advisor, their robo advising option, requires a $3,000 minimum in Vanguard accounts, and costs 0.15% per annum (they actually charge 0.2%, but subtract the costs of the underlying funds, which are pretty low). The underlying investments are limited – total stock, international stock, total bond, and international bond ETFs – but perfectly adequate if you subscribe to Vanguard’s “own the market” philosophy of passive, index fund investing. Your particular combination of these ETFs will be based on your age, circumstances, goals and risk tolerance. Once the basic plan is put in place, Vanguard will take care of rebalancing so you don’t have to monitor very closely. Interestingly, Vanguard doesn’t view this service as appropriate for retirees, who are not eligible to sign up.
It’s worth pointing out that Vanguard also has all-in-one funds – its Life Strategy and Target Retirement funds – that give you a similar package of index fund investments. With such a fund, you can accomplish much the same thing as the robo advisor on your own. The Life Strategy funds’ fees are 0.12 to 0.13%, slightly less than the Digital Advisor fee. On the other hand, Digital Advisor can manage your portfolio across multiple accounts, including taxable and tax-deferred, which is an advantage. (If you create your own portfolio of broad market index funds or ETFs, your costs could be an even lower 0.05% – but you’d have to manage and rebalance them yourself.)
Vanguard also offers a stepped-up hybrid Personal Advisory Service, which gives you access to humans. This service requires a $50,000 minimum (in Vanguard accounts), and charges 0.3% per annum (less if you have over $5 M). At $50k you have access to a team, and at $500k you get a dedicated account representative. In this service, you work with the human advisers to understand your goals, etc., resulting in an investment/financial plan. Online reviews are complimentary about the personal attention and level of detail in this planning process. You have access to a broader array of underlying investments (ETFs and mutual funds) than with Digital Advisor. Vanguard will take care of rebalancing your portfolio, and will check in with you periodically to make sure your portfolio is still appropriate for your situation. Importantly, you have unlimited access to advisers (by phone, email, or video chat), which includes advice on tax strategy, retirement planning, college savings, estate planning, and philanthropy. Certified Financial Planners are available.
Fidelity
Fidelity’s most basic service is Fidelity GO, a robo service with no human involvement. GO charges a 0.35% annual fee, although it does invest in (Fidelity’s own) zero expense index funds. Still, the net cost is higher than Vanguard’s equivalent offering. There is no account minimum, and your allocation/investment strategy is developed via an online interview process. Once set, Fidelity manages and rebalances your portfolio when it strays from its target allocation.
Could you accomplish the same thing with a fund or ETF? Like Vanguard, Fidelity offers all-in-one target-date retirement funds (Fidelity Freedom Index Funds) made up of similar broad market index fund holdings that reduce stock exposure over time. These have 0.12% annual fees – quite a bit less than 0.35%. Or you could manage things yourself by holding several of Fidelity’s zero expense index funds, with no annual fees.
Fidelity’s next step up is its hybrid Personalized Planning and Advice Service, with a $25k minimum and 0.5% annual fee. This service gives you access to a team of advisers and “one-on-one coaching” on investments, planning, and related topics.
Fidelity also offers two higher levels of financial advising for well heeled individuals who would like personalized attention: Wealth Management, $250k minimum, for a 0.5 to 1.5% annual fee; and Private Wealth Management, for those with $2M or more, for 0.5 to 1.05% per annum.
Charles Schwab
Schwab’s robo adviser, Intelligent Portfolios, has a $5,000 minimum and, refreshingly, no annual fees or commissions. Portfolios are constructed from underlying (mostly Schwab) ETFs, with annual management expenses ranging from 0.05 to 0.5%. Schwab estimates that the typical weighted average expense ratio is about 0.14% — the lowest cost of those reviewed so far. One point that may trouble some is that Schwab believes that all portfolios should have a cash allocation (usually 6 to 10%). Cash is invested in the Schwab Bank, which offers lower rates than many online banks. So Schwab’s accounts entail some cash drag, by design.
Schwab’s hybrid offering, Intelligent Portfolios Premium, has a $25k minimum and offers unlimited guidance from a Certified Financial Planner, a plus. Schwab takes a different approach to pricing: they charge $300 up front for plan development, and $30/month thereafter. This makes sense to me – someone with a $2.5M portfolio doesn’t necessarily require ten times the advice as someone with a $250k nest egg. As assets go up, this pricing structure could be quite attractive: someone with a $1M portfolio would pay $660 in the first year, and $360 thereafter, whereas the same person utilizing the hybrid option from Fidelity would be paying $5,000 per year.
Schwab also offers a more upscale financial advisory service, Schwab Private Client, for those who have $500k or more and are willing to pay 0.8% per year.
Personal Capital
Like many others, I use Personal Capital’s excellent free site to aggregate my accounts from various sources, see my net worth and review my asset allocation. I like their retirement planning tool and fee analyzer (which helped me to weed out some higher-cost investments). But how do they make money? It turns out that one of the ways they try to turn a profit is by offering financial advisory services. Since I appreciate the free service they offer, I was happy to spend some time on the telephone with my assigned representative learning about their financial planning/management service. In a nutshell, here’s what I learned.
Their service costs a hefty 0.89% per year up to $1 M, declining modestly above $1 M. For this price, you get access to financial advisers, and a dedicated adviser if you have them manage $200k or more. They claim to be able to provide estate, tax, and other planning advice in addition to investment management. Personal Capital has a particular investment philosophy, which involves weighting the different sectors of the market equally, rather than by market value or capitalization (as is done in most broad market indexes, such as the S&P 500 and Wilshire 5000). I didn’t find their argument in favor of this approach particularly persuasive, and I think my questions and skepticism irked my representative. If you hire them, Personal Capital builds your portfolio by buying individual US stocks (equally weighted by sector) in combination with ETFs for the bond and foreign stock portions of your portfolio. It seems to me that a significant drawback of this approach is the difficulty one would encounter in unwinding 100 or more positions if you decide to leave the program. It could be quite a mess!
In the end, I found it easy to pass on Personal Capital’s service. The cost seemed high and the potential difficulty of getting out an unnecessary added risk. Beyond that, I felt little rapport with the representative assigned to me, who seemed more interested in selling me on his program than listening to my perspective or questions. When I got to the point of saying thanks but no thanks, he actually became somewhat rude. I felt like someone trying to leave a used car lot, followed by a particularly aggressive salesperson upset that he hadn’t made a sale. This experience underscored for me the importance of fit: if I go to the trouble and expense of hiring a human adviser, I want it to be someone I like and trust, who listens well and provides advice of value to me.
What’s the bottom line?
The table below summarizes the financial advisory services reviewed above, and their respective costs for two different size portfolios. At the bottom are two do-it-yourself options, for comparison.
| Financial Advising Service | Annual Fee | Est. Fund Expense | Total Annual Cost | Annual Cost – $250k Portfolio | Annual Cost – $1 M Portfolio |
| Robo Services | |||||
| Vanguard Digital Advisor | .20% | Waived | .20% | $500 | $2,000 |
| Fidelity GO | .35% | 0 | .35% | $875 | $3,500 |
| Schwab Intelligent Portfolios | $0 | .14% | .14% | $350 | $1,400 |
| Hybrid Advisers | |||||
| Vanguard Personal Advisory Service | .30% | .05% | .35% | $875 | $3,500 |
| Fidelity Personal Planning & Advisory Service | .50% | 0 | .50% | $1,250 | $5,000 |
| Schwab Intelligent Portfolios Premium | $300 (one time) $360/yr | .14% | .14% + $420/yr* | $770 | $1,820 |
| Dedicated Adviser | |||||
| Personal Capital | .89% | N/A | .89% | $2,225 | $8,900 |
| Traditional Adviser | 1 – 2% | .25 – 1% | 1.25 – 3% | $3,125 – $7,500 | $12,500 – $30,000 |
| Fee-only Financial Adviser | $2,000 (10 hrs @ $200) | 0** | $2,000 | $2,000 | $2,000 |
| Do it yourself | |||||
| Vanguard Life Strategy Funds | N/A | .12% | .12% | $300 | $1,200 |
| Fidelity Zero Expense Funds | N/A | 0% | 0% | $0 | $0 |
** Assume investments in Fidelity Zero Expense Funds
So which service is best? It depends on what you think you need. If you’re primarily looking for investment guidance and management assistance, one of the robo advisers may be the ticket. Schwab’s Intelligent Portfolios offers the least-cost option at $1400 per year for a $1 M portfolio – the underlying fund expenses since the service itself is free. Vanguard is a bit more, at $2,000 per year for the same portfolio, including both portfolio management and fund fees. Both of these seem reasonable options for the customer who wants someone else to take over the sometimes stressful rebalancing task, and assurance that his/her portfolio is appropriate for age and circumstances. Fidelity’s service costs more ($3500) without appearing to offer more, so is less attractive.
It’s worth pointing out that an investor could accomplish the same thing on his or her own – most easily at Vanguard, using one of their Life Strategy Funds – for about $1200 per year for a $1 M portfolio. The do-it-yourselfer could lower costs even more by constructing a three or four fund portfolio of index funds or ETFs; at Fidelity, you could do this for nothing — $0 per year – using their zero expense funds.
If, like me, you’re looking for assistance beyond automated investment advice, you might be interested in the hybrid options, all of which offer live human advisers in addition to robo investing advice and management. Schwab again has the most attractive pricing, especially for larger portfolios: about $1800 per year, compared to about $3500 for Vanguard and $5000 for Fidelity. Vanguard, Fidelity and Schwab all claim to offer access to expert advisers not only on investment matters but also taxes, college and retirement saving, estate planning and charitable giving. Without actually signing up for these services, it’s difficult to know how easy it is to access this expertise when you need it and how on point and insightful the advice would be. If you find the hybrid approach attractive, and most of your money is at one of these firms, that might determine your decision; otherwise, I would check out the Schwab service.
Personal Capital’s financial advisory service costs more – almost $9,000 per year for a $1 M portfolio – yet my experience gave me little confidence that their advice would be useful. My impression is that the higher fee largely goes to managing a more elaborate investment scheme than the others, rather than to providing higher quality advice.
After all this, it seems I’m not quite at the end of my quest. I find the Schwab hybrid option the most attractive of the services reviewed here, but also feel the need to do more research into fee-only independent planners/advisers who are paid by the hour. I’ll report back on my findings. Maybe I can find that perfect fit, the financial adviser of my dreams!
What about you, dear reader? Have you tried any financial planning or advising services? How did it work out? Let me know in the comment section!
References
You May Also Like
