But what exactly is a hybrid advisor? And what are the differences between the options at these three large investment firms? Keep reading to find out.
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What Is a Hybrid Financial Advisor and Why Does Clark Like Them?
Competition tends to be good for consumers. And if you’re like me, you appreciate choices. But choosing between two different things is usually easier than choosing between many similar things.
Hopefully, this article will help you understand some of the relatively new investing options at your disposal and then, perhaps, decide which option and which company you want to use.
On the heels of the 2007-08 global financial crisis, robo-advisors emerged. A robo-advisor is an algorithm that automates your investments by matching you with a pre-built portfolio based on your goals and risk tolerance.
Because of the automation, using a robo-advisor is much cheaper than hiring a personal financial advisor, which tends to cost in the neighborhood of 1% of your portfolio each year.
However, competition is causing the boundaries between self-investing, investing through a financial advisor and investing with a robo-advisor to become less rigid.
There’s now a new category of investing called “hybrid financial advisors.”
With a hybrid, consumers can enjoy the best of both worlds. You get the cheaper prices of robo-advisors. You also get a more personalized experience with access to a financial advisor who can help you with financial planning that goes beyond investing.
Clark consistently emphasizes the importance of avoiding fees and the impact that minor cost differences can make on your investment portfolio. And many people don’t need full-service financial advisors. But for those who do, Clark loves the low-cost, full-scale financial planning that comes with a hybrid advisor.
These hybrid products invest your money through a robo-advisor (sometimes called a “digital advisor”). They also give you a customized financial roadmap and ongoing access to human advice on practically any financial topic.
Cost Comparison: Vanguard vs. Schwab vs. Fidelity
|Company||Account Minimum||Annual Fee||Average Expense Ratio||Annualized Performance|
|Vanguard||$50,000||Up to 0.30%||0.07%*||9.00%*|
|Schwab||$25,000||$300 + $30/mo.||0.18%||8.69%*|
*Based on Backend Benchmarking’s Fourth Quarter 2020 Robo Report. Robo-advisors recommend different portfolios to different clients. Your actual results will vary based on the portfolio option you select as well as future market performance.
Figuring out the all-in cost of these hybrid financial advisors is a simple formula: A + B = C.
A: The annual fee
B: The average expense ratio of your portfolio
C: Your all-in cost
1. Calculating Your Annual Fee
Note that Vanguard and Fidelity feature flat annual rates expressed as a percentage of your investment.
For example, if you invest $100,000 with Fidelity Personalized Planning and Advice, you’ll pay an annual fee of $100,000 multiplied by 0.50%, which comes to $500.
It’s a little trickier to calculate your annual fee with Schwab, which charges a one-time $300 financial planning fee and then charges $30 per month.
In other words, aside from the initial $300 charge, you’ll pay $360 per year. Schwab’s Intelligent Portfolios Premium requires a minimum deposit of $25,000. At that number, you’d pay the equivalent of a 1.44% annual fee. If you invest $100,000 instead, your annual fee drops to a more reasonable 0.36%.
2. Calculating Your Expense Ratio
Robo-advisors invest in diversified portfolios: predominantly a combination of exchange-traded funds (ETFs) and bonds.
Just like mutual funds, ETFs employ a team of people who manage the funds and charge shareholders for their services.
You’ll almost always pay these fees, called expense ratios, whether you’re investing on your own, through a robo-advisor or with a financial advisor.
“Average expense ratio” is a common industry term that combines the expense ratio of everything in your portfolio.
If you’ve invested $100,000 with Vanguard Personal Advisor Services (PAS) and you’re paying an average expense ratio of 0.07%, your annual expense ratio is equal to $70.
It’s worth noting that Fidelity doesn’t charge expense ratios to its hybrid financial advisor clients.
3. Calculating Your All-In Cost
Fidelity’s annual fee is 0.50%, which is higher than Vanguard’s 0.30%.
Back to the formula A + B = C. Let’s pretend you invested $100,000 into each of these products. How would your all-in costs compare?
|Company||Annual Fee||Expense Ratio||All-In Cost|
Style and Features Comparison: Vanguard vs. Schwab vs. Fidelity
|Company||Investment Style||Advisor Credentials||Tax-Loss Harvesting||Clark’s Ranking|
|Vanguard||Index funds||Fiduciaries (most are Certified Financial Planners)||No||1st|
|Schwab||Defensive||Fiduciaries (all are CFPs)||Yes with $50,000+||2nd|
|Fidelity||Large-cap U.S. stocks||Fiduciaries (other qualifications vary)||No||3rd|
That means they have a legal obligation to put your financial interests above their own, which is an important distinction.
All of Schwab’s advisors are Certified Financial Planners (CFPs), considered by many to be the gold standard of qualifications in the industry. Many of Vanguard’s advisors are also CFPs. It’s unclear whether any of Fidelity’s advisors are CFPs.
Fidelity Personalized Planning and Advice invests your money through Fidelity Go, its robo-advisor. It doesn’t offer the same full-service financial planning as Vanguard and Schwab, but it does offer “coaching” calls with its advisors on specific topics.
Comparing Investment Styles
Robo-advisors are well-diversified and tend to include plenty of ETFs and bonds.
Since hybrid advisors rely on robo-advisors for investing, you’ll almost certainly get a diversified portfolio with a relatively appropriate asset allocation.
However, there are differences between Vanguard, Schwab and Fidelity when it comes to robo-investing styles.
As you saw in the chart, Fidelity’s robo-advisor boasts an annualized performance of 10.08% compared to 9.00% for Vanguard and 8.69% for Schwab.
You can expect Vanguard’s all-in cost to be about 0.13% better than Fidelity’s. However, the annual difference in return has favored Fidelity by 1.08%. That’s a far more impactful number.
Fidelity’s median robo-advisor portfolio skews more heavily toward stock in large-cap domestic companies. Contrast that with Schwab, which retains a larger percentage of its portfolios in bonds and cash.
When the markets are performing well, as they generally have for the last five years, one would expect Fidelity to outperform Schwab. However, the reverse probably should be true in market downturns.
Vanguard’s portfolio allocation is more down the middle.
Of course, you can’t predict with certainty which of the three options will provide the best long-term performance. However, if you have a strongly-held investment philosophy, it’s nice to understand the differences so you can pick the product that most aligns with your way of thinking.
Also, it’s worth noting that strong performance can easily overcome the slight differences between all-in costs.
Vanguard Digital Advisor: Digital Advisor requires a $3,000 investment minimum, charges an annual fee of 0.15% and features a 0.07% expense ratio. It’s a solid robo-advisor: not flashy but inexpensive and fundamentally sound.
Schwab Intelligent Portfolios: I guess the product’s marketing is clever: “No annual fee! No commissions!” However, the 0.18% average expense ratio is pricey. Schwab also holds an outsized percentage of its portfolios in cash, which is a profit puppy for the company. Schwab makes about 0.12% more interest on your cash than it provides to you. The Schwab robo-advisor also invests somewhat heavily in bonds. If you’re getting close to retirement age, that’s probably a good thing. It’s not as beneficial if you’re decades from retiring. Intelligent Portfolios requires a minimum $5,000 investment.
Fidelity Go: Clients with less than $10,000 invested pay $0 in annual fees. If you invest between $10,000 and $49,999, you’ll pay $3 per month. And if you invest at least $50,000, you’ll pay 0.35% annually. Fidelity’s allocation is on the aggressive side, and it doesn’t charge expense ratios. Fidelity Go doesn’t have a required minimum investment.
If you’re only looking for investing advice, you should consider using a robo-advisor rather than one of the hybrid financial advisors I’m comparing in this story.
If you’re interested in researching other robo-advisor companies, check out Clark.com’s list of the best robo-advisors.
There aren’t huge differences between the digital planning resources that Vanguard, Schwab and Fidelity provide. They’re all good at helping you understand how future choices or life events can impact your financial goals.
Vanguard’s planning tools seem to be more closely tied to clients’ communication with its team of financial advisors.
Fidelity’s eggs are in one basket in the form of its well-received mobile app Fidelity Spire.
Schwab’s planning tools stand out because of a nifty product called Intelligent Income that aims to help clients optimize their retirement income strategy.
Tiered Pricing Advantages
You can unlock additional services (tax-loss harvesting, an assigned advisor) and lower annual fees if you reach certain investment benchmarks.
- $500,000 gets you an assigned, dedicated advisor.
- $5 million lowers your annual fee to 0.20%.
- $10 million lowers your annual fee to 0.10%.
- $25 million lowers your annual fee to 0.05%.
- $50,000 unlocks tax-loss harvesting.
- $1 million gives customers access to lower fees and more personal attention through the Private Client program.
- $250,000 grants access to expanded services through its Wealth Management program as well as a 3% cash back credit card.
- $2 million invested at Fidelity and $10 million in total assets allows entry into Private Wealth Management, which gets you expanded financial advisory services.
Hybrid Advisor vs. Full-Service Advisor: What’s the Difference?
Vanguard’s PAS charges 0.30% per year in management fees. The typical rate for a full-service financial advisor is usually around 1% of your portfolio.
If you can pay close to 0.70% less in fees per year by investing through a hybrid, why would you ever choose a full-service financial advisor?
There are some good reasons for working with a “one percenter,” as Clark calls them:
- You’ll get a higher level of personal attention.
- If you’re susceptible to making emotional decisions when the market is tanking, having someone to talk you out of panic-selling is very valuable. That’s not going to happen with the hybrid model.
- Even if you’re able to get a “dedicated advisor” with the hybrid model, your chances of working with that same individual for decades are “zero,” Clark says. There’s no guarantee you’ll be able to work with the same full-service financial advisor for decades, but the chances are much greater.
- Having a personal, long-term relationship with your advisor can be especially helpful if you need nuanced financial services outside of investing. Often those kinds of financial decisions depend on complex family dynamics.
- Services you’ll get from a full-service advisor but usually not through a hybrid (at least not to the same level of depth or customization) include tax and estate planning, planning for long-term health care, insurance, and retirement spending.
Finding, vetting and hiring a fee-only fiduciary you can trust can be a complicated, time-consuming process.
If you choose one of the three hybrid financial advisors I’ve written about in this article, you’ll be working with companies that Clark recommends and trusts. Plus, you’ll probably save a heathy percentage in annual fees.
Clark likes PAS, the Vanguard option, the best. But the differences between the Vanguard, Schwab and Fidelity offerings are fairly small.