The Future of Advice

Vanguard was in town last week for a confab at the Langham Hotel. The discussion covered many topics but by far the most compelling subject was The Future of Advice. What did Vanguard say?

Three Things Going Your Way

Let’s get right to it from the client point of view. Don Bennyhoff, Senior Investment Strategist of the Vanguard Investment Strategy Group, spoke eloquently about three trends Vanguard sees right now in the investment advisory business.

1. Fees Are Going Down: This is an easy one. Expect to pay less for investment management and keep more for yourself. I couldn’t agree more and celebrate every step down the expense staircase. Vanguard has led the way in expense control and I am proud to say we have built Osbon Capital to do the same. For your reference the average industry fee for the $750k to $1.5m size account is 1.09%, for $1.5 to $5m it is .92% and for $10m it is .7%. Firms that will thrive according to Don are those who reduce costs for clients and increase their own margins at the same time. That describes our experience since our founding in 2005.
2. Ethical Standards Are Going Up: Investors are realizing more and more that the fiduciary standard (the legal obligation for the advisor to always act in the client’s best interest) is the better way for them and their money. The old product-push, we-make-it-you-buy-it broker-dealer model of the JPMorgan, Morgan Stanley world is expensive and conflict-ridden. The recent Department of Labor rule on fiduciary standards for 401ks (A Win For The Good Guys) is only the latest example of rising standards here. Don mentioned that Australia is already 100% there for individuals, and the UK and Canada are close.
3. More People Are Moving To Fee Based Money Management: It is estimated that 60% of investment assets are now fee based, from the bottom up ($10k robo-advisor accounts) to the ultra-wealthy ($25M+). Transparent, fully disclosed fees seem to be a better model than the 20^thCentury toll-taker commission practice.

What does it mean for me?

All three trends are good for you, in my view. Lower cost helps increase your returns and allows you to see more easily the value you get for your cost. Secondly, it’s great to see the regulatory sphere aligning with investor interests. The fiduciary standard protects you. Lastly, fee choice expands your control. If you want your money managed by a robot, you can get that. If you want to talk to a human being, you can get that, too. Getting past commissions is a big step forward.

Who Loses?

Change is good, I believe, but it is not costless or beneficial to everyone. When I look at high cost models like those 50 story Goldman Sachs, Bank America, and Merrill Lynch buildings in New York with their large floors of traders, salespeople and analysts, I wonder how long before they have to change. For example, even the uber-profitable Goldman just announced 10% cuts in its trading staff. Ouch for them, more money for you.

PS – if you want to see the future of money management execution I recommend a visit to the Vanguard campus in Valley Forge, PA. While there, Max and I visited their trading floor. It moves $1trillion(!) per day globally in passive style, has 12 people in it, and is as quiet as a library. Very Vanguard.

John Osbon – josbon@osboncapital.com