The Full Spectrum of Financial Advisors

spectrum2Do you recommend Wealthfront? Betterment? WiseBanyan? Schwab Intelligent Portfolios? Vanguard Personal Advisor Services? The upstarts like to bash on the competition, making it seem like they are your digital savior while everyone else is evil. The truth is that they are more similar than different.

Morgen Beck Rochard of Origin Wealth Advisors recently created the helpful infographic below on the wide range of possibilities you can get when you hire a “financial advisor”. Found via The Big Picture. Click for full source image.

advisor_spectrum720

What does it mean? The term “financial advisor” tells you nearly nothing about:

  • Their level of training or years of experience.
  • The type of investment products that they sell (individual stocks, active funds, passive ETFs, whole life insurance, complicated annuities?)
  • How they are compensated (flat fee, percentage of assets, commissions).
  • Whether they are a fiduciary (legally required to always act in the client’s best interest)

Wealthfront, Betterment, WiseBanyan, Schwab Intelligent Portfolios, and Fidelity Go are all in the space of “Fee-only Passive Management” near the top. They are all Registered Investment Advisors (RIAs), which amongst other things are fiduciaries legally required to act in your best interest. They all manage a diversified portfolio of low-cost, passively-managed funds. They all charge a fee based on assets managed. They all provide limited financial planning, mostly using software with inputs that you adjust yourself.

Avoid everything below! Stay away from the yellow, orange, and red boxes. Complicated universal life insurance and equity-indexed annuities. Expensive mutual funds with expense ratios of 1% or higher. Using the principle of inversion, by simply avoiding these products you’re already doing above-average (with below-average fees).

Meanwhile, at the very top is what I cynically call “unicorn land”. Who doesn’t want a qualified human advisor that puts your interests first, provides comprehensive financial planning, and charges a reasonable fee? The paradox we get is that if a high-touch human financial advisor is good at what they do, chances are that they won’t look at your account unless you have over $1 million. Also, they tend to be more expensive. Looking at the Form ADV of Origin Wealth Advisors for example, over 75% of clients are “high net worth” and the portfolio management fee is 1.5% annually unless you have more than $5 million. There is nothing wrong with targeting high net worth clients and charging a premium fee for premium service. A human advisor that keeps you on course and prevent market timing or panic selling could create “advisor alpha“. But 1.5% annually is expensive, any way you cut it.

There are qualified, reasonably-priced human advisors out there, but you won’t find them on every street corner. In contrast, anyone with $500 can click on over the Betterment or Wealthfront and get a solid portfolio built and rebalanced regularly for them. At 0.25% annual fee, a $100,000 portfolio will cost $250 a year. Most people don’t even have $100,000 saved up.

If I had to start all over from the beginning, I’d probably do this. First, save up cash until you get $1,000. Then buy and keep investing in a Vanguard Target Retirement mutual fund. At the same time, learn about investing, behavioral psychology, and market history. Read, read, read. Then manage my own portfolio. But that’s not for everyone.

If you can keep putting money into your Target Retirement fund even during market panics with no other authority figure (robo or human) to help you out, then you could just keep your money there indefinitely. Give it a decade or three, and it will work fine. If you want to hire a low-cost robo-advisor to manage your portfolio, that will also work fine (if you also let it be). The more complicated robo-portfolios might create a slightly-higher risk-adjusted return, and automated tax-loss harvesting could offset part or all of the advisory fee. Remember that you are picking between different shades of blue on the above spectrum. You’re doing pretty good. Don’t become a victim of paralysis by analysis. The enemy of a good plan is a perfect plan.

Comments

  1. Solid advice. The most important thing to do is just start and learn as you go. Better to make small mistakes when net worth is low, time horizon is long, and high fees don’t matter as much.

    I advise my friends and family to go with a low cost robo-adviser if they don’t care to learn. Otherwise DIY with Vanguard if they are interested in investing and want to get more DIY.

  2. He needs to explain the difference between “fee only” and “fee-based” financial planners. Fee only is truly that and they never try to sell you anything or sneakily bring someone else in to sell you anything (of which they usually get a little kick back. Fee-based is just a sneaky way to say we charge a fee and sell stuff. Never go with someone fee-based. Make them tell you straight up which one of those they are and get it in writing.

    • I see a lot of articles talk about that, and it makes sense on a high-level. It would be great if one term was all you needed to know. However, I would go further and ask your advisor to explain exactly (“like I’m 5 years old”) all the ways that s/he makes money and how much. In other words… Not all fee-only planners are good. Not all fee-based planners are bad.

      For example, I think anyone with a spouse or dependent should consider level term life insurance. That is a relatively transparent insurance product, but it is sold on commission. It’s not as big as whole life or universal life, but it’s still sold on commission. The price is the same no matter who you buy it from, so why not buy it from a respectable broker that helps guide you through the process. Not all financial advisors sell insurance, but some do.

  3. Michael Romero says:

    Jonathan – of the folks that you mentioned that are near the top, are there any features that you like? Planning, Tax Loss Harvesting, Retirement Tools, etc.? Additionally, if low fee is key, wouldn’t you choose one of the free ones? Wouldn’t that give you an extra 0.25% – 0.35% on your money?

    Looking to invest $1,000 then $125 per week.

  4. To be sure, there is a space between the green and the blue sections of the infographic above. A fee-based advisor who does full financial planning and then also manages the assets in an index-based low cost portfolio, at a reasonable fee. This is high touch, that includes planning and portfolio management at reasonable fees.

    You are correct that its hard to provide high touch of both at reasonable fees, but with better and better technology it is possible. In this case, a $500k portfolio will often be the soft-minimum. But the right advisor will understand the value of clients with less, who are entering the power earning/saving stage of their life.

    There are not a lot of us, but we do exist.

  5. Good post.
    I put $5k in the Schwab IP but too early to have an opinion. Based on 70/30, money automatically set up below: Fund/shares
    Schwab Fundamental US Large Company ETF 17
    SCHWAB US LARGE CAP ETF 8
    SCHWAB FUNDAMENTAL US… 12
    SCHWAB FUNDA EMG MKTS… 10
    VANECK VECTORS J P… 20
    SCHWAB EMERGING MARKETS… 7
    SCHWAB US SMALL CAP ETF 3
    ISHARES GOLD ETF 21
    SCHWAB FUNDAMENTAL INL… 15
    SCHWAB INTERNATIONAL… 9
    SCHWAB FUNDAMENTAL INTL… 7
    SCHWAB INTERNATNAL SMALL… 5
    CHARLES SCHWAB US REIT ETF 4
    VANGUARD GLBAL EX US… 2
    ISHARES HIGH YIELD… 8
    Vanguard Total International Bond 2
    VANGUARD MUNI BND TAX… 4

  6. Italiangirl says:

    How about a free Vanguard advisor once a year? we did that last year, but he didn’t seem to advise us on anything we didn’t already know.

    • I’m assuming you are talking about Vanguard Voyager Select ($500k in assets at Vanguard required) and Flagship ($1M required)? It appears that Vanguard has replaced their annual CFP sessions with “access” to “a CFP professional through Vanguard Personal Advisor Services if you have a specific investment question”. As I’ve noted before, I feel that Vanguard needs to up their game in the human advisory area. I know there are good folks there, but the number and type complaints I’ve been seeing lead me to believe they have been having problems keeping up with their rapid growth. Their lacking in this area has made me think less of their Vanguard PAS service.

  7. >>> Wealthfront, Betterment, WiseBanyan, Schwab Intelligent Portfolios, and Fidelity Go are all in the space of “Fee-only Passive Management” near the top.

    Curious, why is VPAS not on this list?

    • Nevermind. read your full article. I agree VPAS still has few flaws they need to fix.

    • Vanguard PAS is a hybrid robo-advisor that also offers human advice in additional to portfolio management. The ones listed don’t offer any human access unless you pay extra. That’s the only reason I left it out of that sentence. I don’t want to necessarily fault Vanguard for offering human access that isn’t awesome when the others don’t offer any human access at all. I just wouldn’t pay a lot more for that feature right now given my other experiences with them.

      • Thanks, but frankly it’s not “a lot more”. FiDo Go is 0.35%, whereas VPAS is 0.30% AUM.

        • True, I guess from my viewpoint VPAS doesn’t include tax-loss harvesting or value/size/factor-tilted portfolios or additional asset classes or any of the bells and whistles the other robos that offer the chance for better returns to offset their advisory. I already have what I think is a Vanguard-approved portfolio (which you’d also basically get with a Vanguard Target Retirement Fund), so it feels like I’d be paying for human advice for 0.30%. As a way for my wife to manage our portfolio in case I am unable to, I am still considering telling her to pay the 0.30%, but not if the service isn’t good.

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