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The Wrong Thing to Do With Your Money

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When you hit a home run in your first at-bat, everyone wants to know what you'll serve up as an encore. Unfortunately, the follow-up often proves to be far more disappointing than you had hoped.

That's how I see the latest initiative from Charles Schwab (Nasdaq: SCHW  ) . After serving investors for nearly 40 years, the pioneering broker has decided to join the Wall Street establishment once and for all. In doing so, it's forgetting what brought the company its success in the first place.

All the right moves
Back in 1971, Schwab took what seemed like a small step for a broker -- but it turned out to be a giant leap for the investing world. Just as Southwest Airlines (NYSE: LUV  ) defied the then-regulated airline industry to revolutionize the way people travel, so too did the discount broker hit prestigious Wall Street brokerage firms head-on. Schwab challenged full-service brokers not on their terms but rather on the terms that investors demanded: a lower-cost way of doing business.

Decades later, many investors can hardly imagine what it would be like to spend hundreds of dollars just to make a stock trade. Although higher-cost options like Morgan Stanley (NYSE: MS  ) and Goldman Sachs (NYSE: GS  ) still exist and attract plenty of high-end investors, Schwab and its discount brokerage competitors now play a major role in the industry, especially among those who have the interest and inclination to handle their own investments.

The scariest words in the financial industry
Yet Schwab has chosen to go in a new direction. Taking the focus off its practice of encouraging investors to make their own decisions and giving them tools to help them do that, Schwab is now offering financial advice and managed investment products that take all the decisions out of investors' hands in favor of its corps of stockbrokers.

That in itself wouldn't necessarily be so bad. But the worst part is how Schwab plans to charge for the service: an annual fee based on a percentage of your assets. At a cost of 0.5% annually, you can get a managed portfolio of mutual funds that corresponds to your risk tolerance and investing objective. For an annual fee of 0.75% of your assets, you'll get a more customized planning option that comes with regular meetings with a broker to discuss your investing strategy.

Proponents of the idea note that other financial planning companies offer similar services at higher rates, and so Schwab is remaining true to its goal of providing lower-cost investing services. Nevertheless, the whole idea of charging people more for the same advice just because they've set more of their money aside runs counter to all the incentives people have to make their investments grow.

Putting a value on advice
I'm certainly not saying that financial advice doesn't have value. Everyone needs help from professionals for certain things, and managing your finances is no exception. But many professionals, including doctors, lawyers, and accountants, typically charge based on the amount of work they do. They put a value on their efforts and bill accordingly. Financial planning shouldn't be an exception -- and many would be better-served by a flat rate than paying a percentage of assets.

In addition, it's questionable just how much value Schwab's new products will add. Putting together a managed portfolio of mutual funds isn't much different than what target retirement funds and other funds-of-funds already use -- often without any extra cost above the management fees that the underlying investments charge. And with low-cost ETFs offering easy access to everything from blue-chip stalwarts like IBM (NYSE: IBM  ) to more cutting-edge stocks such as Human Genome Sciences (Nasdaq: HGSI  ) and Google (Nasdaq: GOOG  ) , putting together a reasonable portfolio doesn't have to take a lot of effort -- or thousands of dollars in annual planning fees.

Back on track
In an extremely competitive industry, Schwab clearly wants to differentiate itself from its peers. But modeling itself after the old Wall Street model is exactly the wrong move to make -- and investors shouldn't pay for their advice that way.

If you don't have a discount brokerage account yet, you might be missing out on saving huge amounts of money in fees and commission costs. Check out our broker center to find the broker that's best for you.

Fool contributor Dan Caplinger never pays a lot when he doesn't have to. He doesn't own shares of the companies mentioned in this article. Google is a Motley Fool Rule Breakers pick. Charles Schwab is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy lives up to all its promises.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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