In a world in which the expected long-term return on stocks
after taxes and inflation is 3% to 4% a year at best, financial advisers still
typically charge 1% a year for their services. Vanguard Group, which turned the fund industry
upside-down and drove asset-management fees into the ground, is aiming to bring
the same kind of disruptive change to the business of financial advice.
Vanguard manages $3 trillion in mutual funds and
exchange-traded funds for a pittance of 0.19% in average annual expenses. The
firm's Personal Advisor Services unit, which provides investment management and
financial planning for a flat 0.3% annual fee for most clients, has $3.6
billion in assets, up from just $755 million at the end of 2013.
Vanguard is joining a fast-growing trend toward delivering
dirt-cheap financial advice online. So-called robo-advisers such as Betterment
and Wealthfront use computer models to provide automated portfolio management
for fees of around 0.25% of total assets, or $25 per $10,000 invested.
At Vanguard, the more money you have, the more guidance you
will get from the firm's advisers. At even higher levels—if you have more than
$5 million—Vanguard will send your adviser to meet with you face to face as
needed. Such clients will pay less than 0.3%.
To be sure, if you have only $50,000 to $500,000, Vanguard
won't provide a butler to be at your side for every financial decision you
make. Much of the advice will be generated automatically by the firm's
computers and delivered online, based on information you provide about your
income, assets, financial objectives and appetite for risk. One of the Vanguard
program's financial advisers will then talk to you by phone or video conference
to tweak your portfolio and your financial plan as needed.
Nor, at less than $500,000 in assets, will you get much of
the valuable advice on insurance, mortgages, budgeting and the like that
financial planners elsewhere may provide. And if the market crashes, no one
from Vanguard will plop down on your living-room couch to prevent you from
doing something rash. On the other hand, Vanguard charges so much less than the
typical financial-planning firm, you might not object.
The fund giant is pushing hard into financial planning. It
ranked sixth among all firms in the U.S. by the number of employees who took
this June's exam to become certified financial planners, according to Joe
Maugeri of the CFP Board of Standards, which awards the designation. Vanguard
expects to double the number of CFPs working in the program to 500 from 250
over the next couple of years.
Though Vanguard previously offered financial planning to its
wealthiest clients, virtually all the assets at Personal Advisor Services are
new money rather than transfers from that program. Earlier clients, who paid
0.7%, will soon be switched to the 0.3% rate. Some advisers see the new service
as a way to unload less-wealthy investors who aren't worth their time.
You might want more human contact than Vanguard's new
service can provide, especially if you need complex financial planning or you
tend to panic in bad markets—in which case paying a higher fee could still make
sense. But at the least, you should ask your adviser to justify why his
services are so much more valuable than what an industry leader has begun to
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