Goodbye Commissions
Over time more advisors have shifted to a fee model and away from commissions amid regulatory scrutiny over the costs charged to investors in retirement accounts. Today, 70 percent of advisors get at least half their compensation from asset-based fees, up from 65 percent two years ago, according to a 2016 study by Cogent Reports, a Cambridge, Massachusetts-based research firm.
In a fee system, the cost of the funds is tacked on to the typical 1 percent charge for advice, so using inexpensive funds and ETFs allows an advisor to hold down the price to the customer. Many advisors also now use ETFs to build portfolios that give clients exposure to a range of asset classes.
Jonathan Swanburg, an advisor based in Houston, has switched more of his business to Vanguard ETFs over the past year, attracted by the cost and the unique nature of the company’s business model. The firm is owned by fund investors and profits are passed on to customers through lower fund fees.
Solid Reputation
“A lot of big financial institutions get a lot of bad press for screwing over their clients,” said Swanburg. “Vanguard doesn’t.”
Alois Pirker, research director for wealth management at Aite, said the good will Vanguard has built among consumers has been critical to its success with advisors.
“I don’t have to apologize for using Vanguard,” said Randy Bruns, an advisor from Downers Grove, Illinois.
Advisor Andrew Jamison, who has been a Vanguard customer since 1999, has recently been having doubts about doing business with the company. Jamison, of Beaverton, Oregon, is concerned Vanguard has been moving into the advice business, offering to build portfolios for customers for about one-third the cost a typical advisor charges.
“They have started to be a competitor,” said Jamison. “I haven’t lost any business as a result, but it could happen.”
Rampulla said Vanguard isn’t a threat to independent financial professionals since the company’s advice business is focused on a narrow segment of investors. The unit, Vanguard’s version of a robo-advisor, combines online help with the option of talking to a company representative. It managed $45.8 billion as of Sept. 30.
When Rampulla joined the advisor division, he thought the trends in the industry would eventually help the firm grow. “I was an optimist,” he said. “But I would have to say the results have exceeded my expectations.”
This article was provided by Bloomberg News.