In another great column at the WSJ, Jason Zweig talks about some of the new breed of online, computerized portfolio management packages.  These providers, for a very low fee (as little as free for the first $10,000, up to about 0.25% per year ongoing), will invest your money into efficient low-cost portfolios of index funds (which themselves have ultra-low management fees).

In one of the really unfortunate twists of the way things get described, these services are provided by Registered Investment Advisors.  The unfortunate part is that they are, effectively, just portfolio managers, and certainly don’t do comprehensive financial planning.  However, providers of comprehensive financial planning services are also called Registered Investment Advisors.

The bright side, though, is that any financial planner who is actually doing financial planning rather than just portfolio management — has nothing whatsoever to fear from these low cost providers.  They aren’t competition at all, even though most financial planners also (a) charge as a percentage of assets under management and (b) provide portfolio management as part of the service.

Here’s a link to the article – a worthwhile read.

<http://online.wsj.com/news/articles/SB10001424052702304732804579425210946707526>

The Incredible Shrinking Management Fee

If a new company has its way, the cost of portfolio management could be zero.

Zweig points out something which may be painful for many “financial advisors” to admit:  “Many of these advisers are itching to beat the market by picking individual securities or by “tactically” whizzing in and out of stocks. A few might succeed, but most don’t; overall, that hyperactivity lowers clients’ returns instead of raising them. So you pay a lot but often get only a little.“

And follows with this bit, which is one of the great ironies of the industry: “Meanwhile, the enormously valuable counsel that a good financial adviser can provide—how to manage the complexities of tax, estate and retirement planning, for example—usually comes at no additional cost.“

That is to say that the most common “financial planning” arrangement charges the client a percentage of the portfolio under management – exactly as one would expect a portfolio manager to do (and exactly as every single mutual fund does!) – and the good ones provide financial planning as part of that.  What the clients may or may not know is that they are really, mostly, paying for the financial planning.  Or should be.  And that without the proper financial planning, it’s impossible to know that the client is invested in the right portfolio in the first place.

So if you’re paying the typical 1% of assets to a “financial planner” who is really only managing the portfolio but not doing all the actual planning, you may be paying way too much — since there are excellent low-cost pure portfolio managers.  (In fact, all the now-popular “target date funds” are a form of that.)

And, in fact, (via Cerulli Associates, per Zweig’s article), about 9% of financial advisors do nothing but manage the portfolios, while only 26% of advisors provide comprehensive planning.

If you’re paying a typical percentage of assets and getting all the planning, you may well be getting quite a decent deal, even if that percentage is higher than what these “robo-planners” Zweig is talking about charge — because the harder work – and the bigger value added – comes from the planning.

The article goes on to point out that there is a small subset of financial planners who charge for planning, specifically, and either charge separately for portfolio management or throw in the portfolio management as part of the deal (rather than the other way around), or even just do planning and don’t do the portfolio management at all.  It’s this last batch – who just do planning and want to outsource portfolio management (and many do that anyway) – who themselves – and their clients – all may benefit from this new generation of computerized portfolio management services.