A low-cost advisory niche has developed between full-service advice and no-advice, do-it-yourself securities portfolio construction. These so-called “portfolios-to-go” may be the next big thing and the next big threat to Wall Street full-service brokerage/advisory firms, according to an article by Elizabeth Ody published in Bloomberg.com (“Portfolios-To-Go May Become Wall Street’s Next Thundering Herd”) and InvestmentNews (“Brokerages Next Big Threat? Portfolios-to-go”).
Firms like MarketRiders, Folio Investing, Hedgeable Inc., and Flat Fee Portfolios provide menus of pre-packaged portfolio options. Some, like Flat Fee Portfolios, provide managers who exercise discretionary control over buy and sell decisions. MarketRiders provides investment advice on annual rebalancing, but apparently does not assume discretionary control over client assets. None of them have custody of the clients’ assets even though all of them are registered with the SEC as investment advisors, except for Folio Investing, which is a broker dealer.
These niche investment advisors have attracted more than $3 billion in assets over the last three years. The article cited one wealth manager as saying that investors should be careful because of the lack of performance history available from some of the firms.
In 2009 (the most recent data available) full-service firms Merrill Lynch and Morgan Stanley Smith Barney experienced combined asset outflows of $150 billion, and 10,600 financial advisors left the firms.
Many of the portfolio-to-go firms charge a monthly flat fee ($10 to $29 a month), but Hedgeable apparently charges 0.75% to 1.5% of assets, which is comparable to what some full-service advisory firms charge. On the other hand, the derided “cookie-cutter approach” is probably used by their full-service competitors more than the full-service firms would care to admit.
Other than the discretionary management reportedly provided by Flat Fee Portfolios, there does not seem to be that much value-added difference between a menu of ready-made portfolios-to-go and the supermarket of funds and research platforms offered by discount brokerage firms like Charles Schwab or low-cost Vanguard.
The Princeton professor and author of “A Random Walk Down Wall Street,” Burton Malkiel, said investors could improve investment performance and save money without paying portfolios-to-go providers by simply holding a mix of Vanguard Total World Stock Index exchange traded fund and Vanguard Total Bond Market exchange traded fund, and rebalancing annually.
“Investors should always be very careful to check out the people providing investment advice, especially when what they’re giving you is not tailored to your needs,” Patricia Struck, administrator for the division of securities of the Wisconsin Department of Financial Institutions, was quoted as saying.
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