Services that use algorithms to generate investment advice, deliver it online and charge low fees are pressuring the traditional advisory business
Ann Gugle, a principal at Alpha Financial Advisors in Charlotte, N.C., says her firm has cut its fee on assets over $5 million to 0.125%. Photo: Mike Belleme for The Wall Street Journal
Over the past decade, financial advisers in brokerage houses and independent firms have amassed trillions in assets helping individuals shape investment portfolios and hammer out financial plans. They earn around 1% of these assets in annual fees, a cost advisers say is deserved because they understand clients’ particular situations and can provide assurance when markets fall.
In the latest test of the reach of technology, a new breed of competitors— including Betterment LLC and Wealthfront Inc. but also initiatives from established firms such as Vanguard—is contending even the most personal financial advice can be delivered online, over the phone or by videoconferencing, with fees as low as zero. The goal is to provide good-enough quality at a much lower price.
“It’s always been questionable whether or not advisers were earning our money at 1% and up,” said Paul Auslander, director of financial planning at ProVise Management Group in Clearwater, Fla., who says potential clients now compare him with less expensive alternatives. “The spread’s got to narrow.”
The shift has big implications for financial firms that count on advice as a source of stable profits, as well as for rivals trying to build new businesses at lower prices. It also could mean millions in annual savings for consumers and could expand the overall market for advice.
Competitors across the spectrum agree the demand is there. Advice “is big and growing—it’s what clients are looking for,” said Roger Hobby, executive vice president of private wealth management at Fidelity Investments.
The hunger for help marks a shift from the 1990s, when do-it-yourself investing was in vogue. Back then, the adoption of 401(k) plans moved responsibility for investment choices to company employees just as one of the biggest bull markets in history was boosting individuals’ confidence in their investing prowess. Meanwhile, pioneering online brokerage firms made trading inexpensive and convenient.