(Investopedia) -- Charles Schwab ranks among the leading players in the advisory services space, boasting 11.3 million accounts and handling over 7% of the $45 trillion that people in the U.S. have available to invest.
Now, the financial services company is spearheading major changes across the industry with its decision to charge a flat monthly fee for its robo-advisor, just like Netflix and Spotify Technology SA charge monthly fees for their consumer services. The move away from charging directly for financial advice is expected to cause a ripple effect throughout the industry, per various industry experts and market watchers.
Schwab’s New Subscription Service
- One-time $300 fee for planning
- $30 monthly subscription across all asset levels
- $360 annually after the first year
- Includes investment management, financial plan, unlimited guidance from certified financial planner, other wealth management tools
Source: WSJ
New Service at $360 Per Year
Schwab is rolling out a monthly subscription service for its hybrid robo-advisor, a type of investing which is widely popular among millennials that use rival platforms like Robinhood and Wealthfront. Instead of its former asset-based fee at 0.28% AUM, Schwab is now charging an initial one-time $300 fee for planning and a $30 monthly subscription that does not change at higher asset levels.
For those who sign up with Schwab Intelligent Portfolios Premium, at an annual price of $360 after the first year, they will receive access to investment management, a financial plan, and unlimited guidance from a certified financial planner, regardless of the value of their portfolio.
The service also offers tools that can help clients set objectives, define risks, minimize taxes, save for college, finance a home, manage debt, etc.
Jason Zweig, a Wall Street Journal investing columnist, argues that the old asset-under-management model, which can charge hefty annual fees based on portfolio size, led the masses to believe that investing “is arcane and expensive, while financial planning is mundane and unimportant.”
Recently, however, investment management fees have shrunk, while advice from a skilled financial planner has been shown to “do wonders for your net worth,” per the industry expert.
“Schwab’s move should send a shock wave through the marketplace: Financial planning is the service that is worth paying more for, while it’s investment management that ought to be close to free,” said Zweig.
Ripple Effect
Schwab's sheer size and influence on the retail investment community could encourage other firms to shift their approach.
“We’re going to look back at this day and say it was a monumental change in our business,” said Gavin Spitzner, president of industry consultant Wealth Consulting Partners, to Investment News. He relates Schwab’s recent announcement to 1975 when the deregulation of commissions allowed for the creation of discount brokerages like Schwab itself.
In fact, others in the industry have already adopted the subscription-fee model, including advisers in the XY Planning Network and Cetera Financial Group, per Investment News.
Others are bound to follow suit, says Michael Kitces, co-founder of XY Planning Network, which supports roughly 900 advisors. “I'm giving Vanguard three months – six tops – to similarly launch a high monthly subscription tier for [Personal Advisor Services] for a deeper planning relationship,” he said, adding that “having a firm as large of Schwab move into the monthly model for financial advice validates the approach at a whole other level.”
Kitces, whose firm is adding about 30 new advisers per month, says there’s plenty of room for more entrants in the market. “This ocean is so large and blue and deep right now,” he stated.
What’s Next?
Not all are so upbeat on the lower-cost hybrid model, including Vance Barse, a wealth strategist with Manning Wealth Management. He warns that individuals with complex needs may be attracted by the budget-friendly model, yet could end up underserved.
“Are these CFPs working alongside the client's CPA and estate planning attorney?" asked Mr. Barse, per Investment News. "This news leaves me with more questions than answers, and I am inclined to open an account to evaluate first-hand how evolved these planners are and what the client experience is like."
