Vanguard's new "low-cost" financial advice service.

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This article was posted July 1, 2015.

Back in May I got an e-mail from Vanguard announcing their new, "low-cost" Vanguard Personal Advisor Services(TM). For the "bargain rate" of 0.30% of assets per year a Vanguard hand will counsel you on your finances. (Vanguard helpfully points out that the industry average fee for this type of service is 0.99% of assets per year.)

Vanguard outlines the following scope of work for the 0.30% of assets fee.

https://investor.vanguard.com/financial-advisor/common-questions

There are several steps involved in building and managing your own portfolio. Here's what you'd have to do: Develop a financial plan based on your goals, construct a portfolio with a suitable mix of low-cost stock and bond funds based on your time horizons and risk tolerance, regularly review your portfolio and rebalance it as necessary, stick to your plan even during times of market turbulence, and create a strategy to limit the taxes you pay.

Let's do a little arithmetic on that. That's probably 3 or 4 hours of work the first year, and an hour or two in subsequent years. Financial planners typically charge hourly fees in the range of $75 to $300 per hour depending on experience, credentials, and location. The Vanguard planner talking to you from their call center is likely on the lower end of the range. So we're talking $300 or $400 the first year, and a $100 or so in following years.

Applying a 0.30% percent of assets fee for that kind of pedestrian advice can quickly add up. Over the 60 year course of an investing lifetime (e.g., 30 years saving for retirement, and 30 years in retirement) it can amount to the price of a good-sized house. (For the purposes of this study, we assume the asset allocation below with an expense ratio and trading costs of 0.115% per annum.)

$1 Million Retiree Portfolio Using Three Low-cost Index Funds
Allocation ($)	Ticker Symbol	Fund Name	Expense Ratio (%)	Annual Fee ($)	Portfolio Turnover (%)	Brokerage Comm. (%)	Bid/Asked Spread (%)	Implicit Costs (%)	Total Hidden Costs (%)	Total Costs (%)	Total Costs ($)
$400,000	VFSUX	Vanguard Short-Term Bond Admiral Shares	0.10%	$400	48%	0%	0.00%	0.00%	0.00%	0.00%	$400
$300,000	VTSAX	Vanguard Total Stock Market Admiral Shares	0.05%	$150	4.5%	0.003%	0.42%	0.019%	0.022%	0.072%	$216
$300,000	VFWAX	Vanguard FTSE All-World ex-US Index Admiral	0.14%	$420	5.6%	0.012%	0.45%	0.025%	0.037%	0.177%	$531
-------	.		-------	-------	-------	-------	-------	-------	-------	-------	-------
$1,000,000	= Total Portfolio	Total Portfolio Expense =	0.10%	$970	N/A	N/A	N/A	N/A	N/A	0.1147%	$1147

The chart below describes the differences in portfolio value at the end of 30 and 60 years for three scenarios. We assume the investor has a $125,000 initial balance, a $5,000/year IRA contribution, and an investment return of 8% per annum. Adding the 0.30% Vanguard annual fee reduces the portfolio value by 16% over 60 years. The "industry average" fee of 0.99% per year reduces the portfolio value by an astonishing 43% in year 60.

Comparison of Portfolio Value for Varying Investment Fees over a 60-year Time Frame $125,000 initial balance, $5,000/yr annual IRA contribution during first 30 years, 8% per annum investment return, 3% inflation ====== Figures in constant dollars ======
Fund Name	Advisor Fee & Expense Ratio (%)	Starting Account Balance ($)	Balance in Year 30 ($)	Balance in Year 60 ($)	Wealth Captured by Financial Advisor in Excess Fees ($)
(No advisor.) Vanguard Admiral Fund Portfolio (0.115% fee)	0.115%	$125,000	$746,698	$2,990,535	N/A
Vanguard Advisor 0.30% of assets fee (Vanguard Admiral Fund Portfolio (0.115% fee)	0.415%	$125,000	$688,678	$2,520,170	$470,365
Industry Average Fee 0.99% of assets (Vanguard Admiral Fund Portfolio (0.115% fee)	1.105%	$125,000	$572,044	$1,699,242	$1,291,293
Note (1) Starting balance of $125,000 was chosen so that the 40% allocation to the Vanguard Short-Term Bond Fund would meet the $50,000 Admiral minimum.

For another look at how fees affect your retirement, you can use the Retire Early Shaft Detector to analyze your own situation. For example, the spreadsheet below shows the results for a client investing in funds with an expense ratio of 2.00% per year (about what Wall street expects to skim from a client.) The benchmark is the 2.7 basis point annual fee for the Federal Employees' TSP (about the best retirement savings plan around). The Shaft Detector assumes that the higher cost mutual fund manager invests the excess fees they take from the client in the benchmark portfolio and calculates the value of their portfolio over time (see the red bubble on the spreadsheet below.) You can change the figures in blue on the spreadsheet to run your own numbers.

What to conclude from these results?

Paying a percent of assets fee for financial advice is just nuts. Unless your retirement savings remains very small, you'll end up paying a lot more for the advice than you should. Hire a financial planner that charges by the hour and get a firm scope of work and billable hours required to complete the task. Better still, buy or borrow one of the many books on investing or financial planning and educate yourself on the topic. I know that the time I spent learning about investing was by far the most highly-compensated hours of my engineering career.

Resources for more information

The Economist -- Human wealth advisers are going out of fashion -- Good discussion of the available on-line financial advice offerings. A couple have lower fees than Vanguard.

ExxonMobil Savings Plan Brochure (PDF) -- Fund expense ratios and 401k mgmt fee on page 17 of document. Annual fees ranges from 2 basis points for the bond fund to 6 basis points for the international equity fund.

USA Today -- Are fees draining your 401(k) retirement savings? (Aug 25, 2009) Article notes that some small company 401(k) plans can have annual fees & expenses as high as 4.8% of assets.