How to get big help for small assets
If you don't have several hundred thousand dollars to invest and ask for help from a no- commission financial planner, you're likely to hear the following: "We only work with high net-worth individuals."
In other words, if you're not rich, you're on your own. Or, at best, you get help from people with financial products to sell.
But two giants in the financial services business are trying to fill the need for low-cost, no- commission planning.
For the past several years, the Vanguard Group in Valley Forge, Pa., and San Francisco-based Charles Schwab have been offering a variety of ways for the less affluent to find out if their portfolios have the right mix of stocks and bonds, if they can save enough for their child's college costs, or if they are on track to a secure retirement. In the last year or so, Vanguard has been expanding its retirement-planning service.
Both companies' services are fairly cheap. Vanguard's basic service is free to anyone who invests or rolls over $100,000 into an IRA. A more comprehensive service, which includes personalized portfolio management, has a minimum annual fee of $60. Meanwhile, Schwab's lowest-cost service has an annual fee of 0.35 percent of eligible assets - $350 for a $100,000 portfolio, for example - with a minimum quarterly fee of $65.
For comparison, many financial planners charge 1 percent to 1.5 percent of assets annually to manage money, in addition to any hourly fees they may charge to meet with clients and develop plans.
Large financial-services firms such as Merrill Lynch and American Express have offered low-cost or even free financial planning for many years, but the plans usually include commission-based investments or insurance products.
At Vanguard, "the planners here are not compensated any other way than straight salary," says Ellen Rinaldi, director of the firm's financial- planning program. "There are no commissions here. There's no incentive to move people into anything that we wouldn't think was appropriate."
All the planners at Vanguard either have their Certified Financial Planner certification or they are working toward it, she adds.
While Vanguard has been providing low-cost investment and asset-allocation advice for almost 10 years, the company's Retirement Advisory Service recently began "providing more comprehensive planning, including things like risk assessment," Ms. Rinaldi says. "Are you carrying enough insurance? Are you ready to retire? If you're not, what are some of the choices available to you?"
Since this is a Vanguard service, investors will be directed primarily to Vanguard products, especially its large menu of index funds, although some of its actively managed funds may also be included.
But "if we have clients who have funds they want to keep, we will plan around them," Rinaldi says. "It's quite common that a client has real estate or equities that they're intending to continue holding. We'll work around that."
Schwab, meanwhile, has four financial-planning services, two of which are aimed at the middle market. The Schwab Advised Investing/Foundational includes a yearly portfolio consultation, quarterly updates, and access to ongoing advice. With the Schwab Advised Investing/Signature, you get your own investment consultant who is expected to deliver a customized portfolio and recommendations based on your needs, goals, and risk tolerance. The annual fee for this service is 0.35 percent of assets, with a minimum of $250 a quarter.
"This is not just asset-allocation advice," says Schwab spokeswoman Sarah Bulgatz. "We can advise clients on selling stocks, mutual funds, and fixed-income investments."
The Schwab programs also offer a wide variety of mutual funds from several dozen fund companies - including Vanguard - as well as research from providers such as Goldman Sachs, Argus, and Morningstar, Ms. Bulgatz says.
Financial-planning experts, not surprisingly, have mixed reactions to these services.
While acknowledging that some planning is better than no planning, Steven Enright, a fee-only financial planner in Old Tappan, N.J., is concerned that people will get "cookie-cutter" plans rather than plans tailored to their exact needs and goals.
"This is not custom financial planning in any way, shape, or form," he says.
The planner's experience and overall knowledge should also be considered, Mr. Enright says. For example, he points out that a planner's advice should not be limited to investments and retirement; it should also cover college-planning techniques and federal and state tax issues. Also, some people may need an analysis of their cash flow, particularly if their spending doesn't leave enough money to put toward long-term goals like retirement or college.
"I think these plans are good for what they are," says Sue Stevens, director of financial planning at Morningstar Inc., in Chicago. "They offer good canned advice. And for someone whose situation is not too complicated, they could be helpful. But they can't do more complicated planning. For that you need someone who knows the right questions to ask. I don't think these programs are a threat to any traditional planners."
Finally, some planners do offer fairly low-cost planning services.
"We offer individual consultation for up to three hours at the client's home or office for $500 to $750," Enright says. For that money, he asserts that the client gets some advice about insurance, investments, college funding, and retirement.
If anything is in abundant supply in the financial services business, it's confusion. For example, 63 percent of people surveyed said they believe stockbrokers and investment advisers are required to disclose all conflicts of interest before providing financial advice, according to a recent poll by discount broker TD Waterhouse. The reality: They're often offered generous incentives, including cash bonuses and trips, by brokerages and mutual-fund companies to sell certain products - incentives that usually aren't disclosed to the customer.
Here are key terms that can help clear up the confusion surrounding advisers:
Brokers - The broker acts as an intermediary between a seller and a buyer, usually charging a commission. While many stockbrokers also provide financial advice, guidance, and even planning, their income - and their jobs - depend on their ability to sell financial products.
Financial planners - Almost anyone can call himself or herself a "financial planner," but basically, they should help clients identify financial goals, assess risk tolerance, and suggest and then monitor their investments.
Fee-based advisers - This is one of the industry's more confusing terms. A fee-based adviser may charge an hourly fee to meet with a client and prepare a plan, as well as an annual fee, perhaps 1 percent of assets, to manage money. But the adviser can also receive commissions for selling financial products.
Fee-only advisers - These planners charge hourly fees and/or annual fees to give advice and manage money, but do not receive commissions. The National Association of Personal Financial Advisors is the largest organization of fee-only planners. NAPFA members pledge not to accept commissions or compensation that is contingent upon the purchase or sale of financial products.