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The Clock May Be Ticking Down for Old-Line FAs

January 22, 2015

It could be just a matter of time before clients come to understand, en masse, that financial advisors cost too much, writes Wall Street Journal Sunday columnist Jonathan Clements. That’s especially true of traditional advisors who hang their hats primarily on investment acumen.

Clements sees similarities between index funds and robo or online advisors in challenging an existing order. “During the 10 years through year-end 2014, index funds have grown to 35% of stock-fund assets from 18%, according to Chicago investment researchers Morningstar,” he writes. And, he adds, this shift has saved investors “a bundle in fees” — even those who still use advisors.

Old-school clients “might have paid 1% a year to their advisor and 1% for the actively managed funds that the advisor recommended, for a total of 2%,” says Clements. “Today, these same clients might still pay 1% to their advisor, but now they own index funds that charge 0.2%, so their total cost has dropped from 2% to 1.2%, a 40% decline.”

To be sure, these and other index-fund users are giving up on the chance to beat the market. But it’s an increasingly popular view that the odds aren’t worth the expense.

In all, saving clients money on fees sounds like a formula for FA success — especially when it doesn’t dig into their cut. “Advisors have managed to cut their clients’ costs without cutting their own fees,” Clements writes. However, the advent of robos like Betterment, SigFig and Wealthfront means “the standard 1% fee is now under pressure.” Indeed, says Clements, these players “typically charge 0.25% a year” — and less for big accounts.

How far robos succeed in overturning the status quo will depend on their ability to attract millionaires, as opposed to Web-smart young professionals and penny-pinching oldsters who count as mass affluent. In other words, they have to convince a lot of rich people that all-in fees of 0.5% or so make it worthwhile to give up on customization, coaching and hand-holding in hard times.

It will be a much harder fight, says Clements, if traditionalists respond to the online upstarts by augmenting portfolio-focused service with “detailed advice on estate planning and tax issues as well as full-blown financial plans.”

By Thomas Coyle
  • To read the Wall Street Journal article cited in this story, click here if you have a paid subscription.