When Schwab introduced its revamped pricing plan for its Schwab Intelligent Advisory service, which includes “unlimited” financial planning guidance from a human Certified Financial Planner, for an up-front cost of $300 and a monthly retainer of $30, it set off a lively debate in the industry. As advisors start to untangle financial planning from investment management, just what is “financial planning” worth?
At one level, a service is worth what anyone is willing to pay for it. A recent survey by Michael Kitces found the average cost of a financial plan charged by advisors is around $2,400. Still, planners seem to have a hard time communicating to prospective clients what it is they are paying for in the first place.
Is financial planning setting a household budget, with debt reduction plans and some emergency fund savings goals? A projection of future resources compared with future needs for goals like college tuition and retirement? Is it tax planning? Determining how much insurance a client needs? Can the client comfortably buy a second home? A boat?
Planning is all those things, of course, and more. And by preventing a client misstep in any of those areas, advisors pay for themselves many, many times over, no doubt. Will my Schwab phone-based advisor answer all those questions? If so, $300 followed by $320 a year seems like a bargain, and those charging $2,400 with a higher monthly retainer are in trouble. (Set aside trust and estate planning for high-net-worth clients for the moment, where planning takes on much more complicated, and costly, dimensions.)
With the variable costs of financial planning becoming more visible, I think prospective clients will struggle to evaluate the potential benefits between providers—both the human and the more automated offerings.
Morningstar’s David Blanchett has made some headway here. In the most recent Journal of Financial Planning, he used several years of the Federal Reserve Board’s Survey of Consumer Finances to look at how household financial decision-making, as opposed to financial outcomes like portfolio returns or retirement readiness, varied depending on four primary sources of information: financial planners, “transactional” advisors (i.e., “brokers” or “bankers”), friends or the internet.
Across the five areas the study examined—portfolio risk, savings habits, life insurance, credit card debt and emergency savings—he found households working with planners made the best decisions across all the categories, with the exception of credit card debt. Households getting information from the internet were the second-best decision-makers. Blanchett admits the scope here is limited, and there is a self-selection bias; if a household is using a planner, they are likely savvy decision-makers in the first place, and so it’s hard to tell if the presence of the planner really made the difference.
Still, it’s a start. If financial planners are going to compete with the low-cost providers like Schwab for basic financial planning, they’ll need better metrics around just how much value they are providing.
David Armstrong
Editor-In-Chief