How Much Should Financial Advice Cost?

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There’s an argument among financial advisers about what investment advice should cost, and Goldman Sachs Group Inc. has thrown its considerable weight into the debate.

For as long as anyone can remember, the average fee for investment advice has been 1% a year on the value of clients’ assets. But even as fees have dropped across the industry on everything from brokerage commissions to mutual fund expense ratios to the share of profits hedge funds demand from investors, the old 1% advisory fee hasn’t budged.

On one side are those who say that advisers who charge 1% or more are overreaching and failing to look after their clients’ best interests, particularly when expected returns from U.S. stocks and bonds are at historic lows. On the other side are those who argue the free market is the best arbiter of prices — if investors are willing to pay 1%, then that’s the right fee.

Goldman charged into the debate last week with the rollout of Marcus Invest, its automated money manager. Marcus joins a crowded field of robo-advisers offering managed portfolios for a lot less than 1%, including those of rivals JPMorgan Chase & Co. and Bank of America Corp. Goldman’s bot charges 0.35% a year.

Financial advisers are quick to point out what robots won’t do. They won’t customize a portfolio to individual needs and wants, advisers say. They won’t hold your hand when the market tumbles and you want to bury what’s left of your money in the backyard. And they won’t encourage you to save more for retirement or help you decide how much you can safely spend when you get there.

Leaving aside that the bots will eventually do all those things, if they don’t already, Marcus raises an unavoidable question: Is the human touch worth an extra 0.65% a year? That’s a more urgent question for financial advisers than they realize because Goldman and other Wall Street titans are coming after retail investors, the target market for most advisers.  

“You can view this as the first step in Goldman Sachs getting into investing for the consumer,” Stephanie Cohen, Goldman’s co-head of consumer and wealth management,  told Bloomberg TV. Goldman wants to be “the leading digital banking platform” and is “really focused” on the democratization of finance, she said.

Of course it is. With millions of new investors flocking to Robinhood Markets and other trading apps, Goldman and its Wall Street peers rightly see retail investors as a big opportunity. Most of them are Millennials and members of Generation Z, and while they may not have a lot of money now, they stand to inherit tens of trillions of dollars over the next decade in what is widely expected to be the biggest ever transfer of wealth. That’s on top of the savings many of them will accumulate over time.

Goldman is now in position to grab that money. Marcus combines what is arguably the best brand in financial services with technology-enabled, low-cost portfolios that are likely to appeal to younger investors. And once Goldman gets them in the door, it can sell them additional services such as banking and lending and nudge the wealthiest among them into higher-cost investments. 

Financial advisers at Goldman have been doing it for decades. Goldman’s wealth-management division has long managed money for uber-rich investors, and they almost certainly don’t pay anywhere near 1%. Typically, the more money investors have, the lower the fee. According to latest numbers compiled by industry observer and financial adviser Michael Kitces, while the median asset-based fee for clients with $1 million or less is 1%, it drops to roughly 0.8% for those with $5 million. More than likely, a well-heeled Goldman client with tens or hundreds of millions of dollars pays even less. 

It makes sense to lower the percentage for larger portfolios because the fees would otherwise become excessive, but unlike most advisers who charge asset-based fees, Goldman has other levers to charge clients. It can lend them money, slot Goldman funds and other homemade financial products into their portfolios and collect placement fees on venture, private equity and hedge funds it sells them. 

What’s different about Marcus is that retail investors can have Goldman manage their money for a fee comparable to that of the bank’s richest clients without much danger of paying more, at least for now. U.S. securities laws still restrict mom-and-pop investors from putting money into private assets and hedge funds, so their money will stay in lower-cost exchange-traded funds Marcus recommends. They’re also free to decline Goldman’s add-on services.

It all adds up to a tempting alternative to 1%, although Marcus isn’t foolproof, either. Investors who are comfortable handing their money to a bot might decide to take it one step further and manage their own money, saving 0.35% a year. Marcus’s “core” portfolios can be replicated easily, or very close to it, with just two ETFs, a global stock fund and a diversified U.S. bond fund.

There isn’t one answer to the fee riddle, of course. Investors will have to decide how much they value investment advice from a human or a robot, if at all. But Goldman’s entree into portfolio management for retail investors is a signal to financial advisers that the days of 1% are numbered. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.

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