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
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
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
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
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.
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