Financial Planning Evolving Into a Service for the Masses

Better financial planning advice is on the way--and it’s not just for the wealthy anymore.

Thanks to technological advances and increasing competition, the average American already has access to financial planning tools and resources once available only to the rich, if at all.

In the future, investors will be even more likely to receive advice that’s objective--or at least of higher quality, many financial planners say.

And if you are one of the increasing number of Americans with a net worth of $1 million or more, you may soon have access to the kind of personalized, comprehensive and far-reaching advice and services once reserved for families with $100 million.

“The good news is that financial planning is going to grow,” said Ross Levin, a leading certified financial planner in Minneapolis. “More people will be able to be served at a variety of pricing structures, and they’ll have more choice.”

What’s driving the trend is the convergence of three factors:

* Increasing interest in financial planning as stock wealth grows and responsibility for retirement planning falls back to the individual

* The expanding power of the personal computer and the Internet.

* The huge profits reaped by firms that specialize in giving financial advice, which have inspired accounting firms, banks, brokerages, mutual fund companies and others to launch planning arms.

“Most financial planners will tell you they’re making more money than they ever dreamed,” said Mark Hurley, chief executive of Undiscovered Managers, a Dallas-based mutual fund company that last month released a report about the future of the advice industry.

The report is controversial among planners because it predicts that today’s fragmented financial planning market, populated by hundreds of sole proprietorships and small firms, soon will be dominated by 40 or 50 large companies.

“Business is so good. That makes it so attractive that by definition it’s going to change,” Hurley said.

The competition has already led many financial planners and investment managers to reduce their fees for large accounts. Annual charges, once routinely 1.5% to 2% of assets, have dropped to an average of 1% or less, said Harold Evensky, president of the Certified Financial Planner Board of Standards and a longtime financial advisor. Several major brokerage firms are competing by combining similar management fee arrangements with cheap Internet trades.

For an initial fee plus the percentage, a typical high-end, comprehensive financial planner will review a client’s entire financial situation, including budget and credit, insurance, taxes, estate plans and investments.

The fiercest competition is for what Hurley calls the “semi-affluent investor”: the 3 million-plus households with net worths of $1 million to $10 million.

To survive, financial planning firms will have to offer these desirable customers more services for less money, Evensky said. Providers will need to more closely resemble the “family office” firms that serve the very wealthy, some planners say, offering all-inclusive services from tax preparation to assistance with salary negotiations.

“In the future the client will pay 80 basis points [0.8%], and we will have to do their estate planning and their tax preparation,” Evensky said. “We can outsource it like we do now, but [clients] will be getting those services as part of their fee.”

Other planners say the changes won’t be as radical, or the cost cuts as deep, as the Undiscovered Managers report predicts.

Tim Kochis, a fee-only certified financial planner in San Francisco, said demand for the specialty seems to be growing even as more competitors enter the market, so fees are not likely to fall drastically. Like many planners, Kochis contends that personal relationships with clients will prevent mass defection over fees.

Kochis does believe that financial planners probably will have to become more comprehensive to survive. Kochis’ firm, Kochis Fitz, helps clients with mortgage negotiations and career coaching in addition to providing asset management and financial planning. But he also knows that some clients will continue to pick tax, estate and investment advisors separately.

“Some people are going to like a one-stop shop. Others like a variety of advisors, sort of the diversification notion, with one [advisor] coordinating it all,” Kochis said.

The affluent won’t be the only ones enjoying more choices. Growing 401(k) accounts among smaller investors have also attracted interest from some financial services companies.

The traditional problem with serving smaller savers has been that fee-only financial planners found their accounts to be unprofitable. A $1-million account typically requires the same amount of planning, management and research as a $100,000 account, but the smaller one might generate only $1,000 in annual fees--far less than the $10,000 the larger account would bring.

That has led many financial planners to accept only clients with a substantial sum of investable assets--typically $250,000 and above.

Few fee-only planners offer hourly or flat rates for financial planning, and their fees for a comprehensive plan--typically $1,500 to $2,500--place them out of reach of smaller savers. People with smaller accounts are often left to their own devices or forced to choose among commission-based advisors, who reap fees based on the investments they recommend.

Today, however, some financial services firms are using technology and following new business models to tackle smaller savers. The market is far larger--Hurley estimates that about 70 million households have some assets to invest--with less competition so far, making it attractive to the pioneering companies.

Mutual fund giant Vanguard Group, for example, offers retirement, investment and estate planning services for $500 each. Customers fill out forms and the information is fed into the no-load company’s proprietary software, which issues a report. Clients have telephone access to a Vanguard financial advisor who explains the findings, said Richard W. Stevens, a Vanguard principal.

Vanguard has also set its sights on the wealthy, offering an asset-management service that monitors and regularly reallocates a portfolio for a yearly account fee of 0.65% of assets. The market is investors with $500,000 or more, Stevens said.

Vanguard rival T. Rowe Price recently unveiled a service that provides retirement distribution planning using Monte Carlo simulations--a sophisticated computer model that estimates the probability of investment outcomes. T. Rowe Price believes its market is investors with portfolios worth $250,000 to $700,000.

Neither company expects to make an immediate profit on its services; both say a key selling point for reaching its target markets is telephone access to an advisor, which increases costs.

“People want that personal touch,” said Todd M. Clary, T. Rowe’s director of financial services.

Other companies hope to serve smaller investors at lower cost by providing individually tailored results with no human advisor involved.

Financial Engines, a company created by economist and Nobel laureate William F. Sharpe, offers free Monte Carlo simulations on its Web site with asset-allocation advice provided for people who pay a $14.95 quarterly fee or whose companies have signed them up through 401(k) plans.

The company currently has contracts with 3Com, Merck, Time Warner and Scudder Defined Contribution Services to provide retirement planning and asset allocation to 401(k) savers. It hopes to expand its services to provide more comprehensive financial planning.

Other Web-based financial sites make money with annual fees or by charging companies to advertise on their sites. The latest versions of two leading personal finance software packages, Intuit’s Quicken and Microsoft Money, feature extensive financial planning work sheets, advice and videos to guide users.

Some planners, including Evensky and Levin, worry that such services fall short of true comprehensive planning because users have no access to an advisor’s experience, judgment or coaching.

“Financial planning is 20% science and 80% heart,” Levin said. “You can institutionalize the science part, but not the heart.”

Once, more investors trusted their traditional stockbrokers. But cynicism about commissions and competition from cheaper trading services have pushed brokers to evolve into something more like a financial planner. “Traditionally, brokers charged a fee for the transaction and they would give advice for free. Now the transactions are free and they charge for advice,” Evensky said.

“If they can’t keep a client for six years or so, they’re going to lose money. In order to stay viable, they’re going to have to deliver” good advice, he said.

Not all planners agree that such brokerage customers will be better served. Gary Schatsky, head of a fee-only planners group, remains a skeptic, fearing that big financial services companies will claim to offer more objective advice while continuing to push higher-cost, proprietary products on unsuspecting consumers.

Talk of fee-based planning is designed “to take the consumer off the scent of what they really want, which is objective advice,” said Schatsky, executive director of the National Assn. of Personal Financial Advisors, a group that represents planners who are compensated solely by client fees rather than commissions.

“There’s this wholesale push talking about ‘fee, fee, fee.’ They are responding to public demand without really changing what they sell,” Schatsky said. “That’s what a multimillion-dollar advertising budget will buy you.”

Hurley, however, believes that competition and increasingly savvy investors will drive up the quality of advice across the board. Hurley said traditional financial services firms “dropped the ball” by failing to provide objective advice in the past, which led to the growth of independent financial planning firms. The financial behemoths are unlikely to make the same mistakes again, he said.

“The clients are going to get much broader, better advice at a lower cost,” Hurley said.