For the longest time traditional financial advisors would use fear as a control method to maintain control over their clients assets. They would feed their clients lines about having access to the latest technology, the best funds, the greatest this, or the best that. Well thats all starting to change and people and getting wiser to the ways. In fact, people are making wiser decisions about to do with their money and finding how to invest it more efficiently.
Two of the main reasons as highlighted in a recent article by Johnathan Clements at MarketWatch “Financial advisers are in the crosshairs” are general trends that I agree and I dig into below.
- Falling costs – Generally over time clients used to pay a historical 1% to a traditional financial advisor to manager their funds. Then they would be required to pay an additional fee on the individual funds that they would own and typically these could range between 0.85% – 1.25%. Although over the last 5 years as the numbers of funds has increase significantly the fees has dropped by over 30% thus allowing traditional advisors to charge less . Looking at the examples below, we can begin to understand why people would start to challenge the notion of needing a financial advisor if investing in a general index fund has become so easy and provides similar results over-time.
- would I pay a financial advisor to invest my money in an index fund when I could do that myself.
2007 example $100,000 assets = $1,000 advisor fee (1%) and $1,000 active fund fee (1%) = Total fees $2,000
2014 example $100,000 assets = $1,000 advisor fee (1%) and $500 active fund fee (0.5%) = Total fees $1,500
2014 example $100,000 assets = $1,000 advisor fee (1%) and $200 passive index fund fee (0.2%) = Total fees 1,200
“Over 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. ”
- Rising competition – The rising competition was born not only amongst other traditional financial advisors but more from the expansion of the services provided by online brokerage firms TD Ameritrade, Charles Schwab, etc which some free basic advice to its clients. While new comers “Betterment.com, SigFig.com and Wealthfront.com” charge a nominal 0.25% depending on account size to help. The traditional brokerage firms have further switched to a “fee-only” system that focus more on clients with assets “above $500,000 or $1 million ” and choose not to worry if they lose clients to lower-cost online advisors.
All of these factors have combined to create quite the squeeze and the further permeation of information and willingness of people to seek out the information (especially from sites like BYOAdvisor.com) help people avoid high fees and save more for retirement. So if you’re looking to make a change focus on the factors that you can change and review your current investing situation to make sure you’re investing wisely.
Source: Financial advisers are in the crosshairs by Jonathan Clements @ Marketwatch.com 
Source: Trends in the Expenses and Fees of Mutual Funds, 2013