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  • Writer's pictureDavid Miller

Vanguard Sets a New Standard, Schwab Hits a New Low

In recent articles, I have seen an increasing number of journalists recommending the idea that a financial advisor needs to get comfortable with negotiating their fees. This is a slippery slope and I would suggest that for anyone who engages in this activity, it is the beginning of the end.

Schwab’s robo-advisor, Intelligent Portfolios, is charging a whopping 0 BP. And as we all know Schwab, TD Ameritrade and virtually all other trading platforms, have also dropped their fees to zero. How are they making money? Simply by the margins they can generate with cash on hand.

Racing to zero fees for services provided is not a productive activity for most businesses to engage in unless it is automated for mass marketing and delivery. In 1985, Merrill Lynch’s average income for AUM was 1.9%, 2006 it was .85% and in 2015 the industry average is .63%. Financial advisors and their firms are being disrupted.

What is the alternative to an advisor negotiating their fees?

An advisor needs to emphatically state that they “don’t negotiate their value”. This isn’t just a catchy phrase, it should be an advisor’s credo. Anyone requesting that an advisor negotiate their fees is asking for an advisor to provide less service and less value, and they probably have a misconception about what an advisor versus a broker actually does for their clients.

What is the new industry standard for value that a financial advisor needs to compete with and at what cost? The following video paints a precise picture. This is a must watch for anyone in the financial service industry.

Vanguard charges 30 BPs for a service which includes interaction with a dedicated advisor, goal setting, asset allocation and monitoring of your investment portfolio. If you charge .99%, which is normal for a full service advisor, this is more than 3 times what Vanguard is charging. The simple question is: Do you provide more than 3 times the value? The following is one of the headlines on the Vanguard Personal Advisor Services web site:

Keep $235,255 more working for you!

This is based on $250,000 invested over 30 years. It is compelling and gets your attention immediately. It represents an increase of over 20% of the assets invested after this time period. But is it a realistic number that takes everything into consideration? Investing isn’t just an algorithm. Investing is a composite of an algorithm, asset allocation, re-balancing and probably most importantly, dealing with an investor’s emotional and behavioral reactions to market conditions, both positive and negative. In addition, an advisor can provide the client with complete financial oversight of their entire situation from estate planning to extended health, tax implications to retirement planning.

A financial advisor is a confidante that an individual develops a long term trusting relationship with. They are the one your turn to for advice on everything and anything that relates to your financial life and often much more. The fees they charge can, and typically do reflect the guidance they provide for all aspects of their clients financial life..

When an advisor articulates their value and knows that their clients understand and appreciate the service they provide, they have taken the first step to halting the slide in their compensation and how it is perceived.

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