Contemplating retirement and receiving an inheritance prompted Richard Jones, a 62-year-old corporate marketing executive, to seek financial-planning help. He wasn't interested in an investment overhaul but more of a one-time checkup. Instead of going to a financial planner, Jones called Vanguard Group, the mutual-fund family where he had an account, and completed its comprehensive questionnaire. Vanguard recommended that Jones invest more money in domestic index funds and international equities. "I was able to implement the financial plan the minute I got it," says Jones.
Vanguard is well known as a purveyor of no-load funds. But recently it has joined other mutual-fund companies, discount brokerages, and securities firms that are making a push into all-around financial planning. "Everyone is trying to figure out what services can be economically provided and still add value," says Meredith Callanan, vice-president of the marketing group for T. Rowe Price Associates. The prospect of baby boomers having to pick from among myriad mutual-fund choices as they face the added financial responsibilities of inheritances and lump-sum retirement payouts has created the need for more guidance.
MAKING THE PITCH. It was not long ago that Vanguard just sold mutual funds, Charles Schwab processed transactions, and Smith Barney brokers sold stock. The menu of options they offered depended on a customer's tolerance for risk and how long the money needed to be invested. But now they're fine-tuning their pitches by first offering to provide a more comprehensive financial picture to each customer who calls or walks into a branch office. While the bulk of the planning focuses on mutual-fund allocations, these financial-service companies also offer other asset classes such as annuities and life insurance. The hope, of course, is to steer clients into products that will generate commissions and fees. So it may be wise to consult a fee-only financial planner, who may be less inclined to suggest a particular fund family, before investing.
Today, investment consultants at firms such as Smith Barney and Merrill Lynch encourage clients to complete a questionnaire about financial needs and goals. The customer then receives a computer-generated plan and the opportunity to discuss it with a representative who recommends various products and services. "The plan provides the customer with a structure to work through all financial circumstances, and while it is valid elsewhere, we hope the customer would be inspired to work with us," says Mitchell Farkas, director of Merrill Lynch's financial-planning group. Smith Barney's initial plan is free, but clients can pay $100 for a more comprehensive program that will help with complex issues such as how much life or disability insurance is needed. Merrill Lynch charges a flat fee of $175.
The new breed of consultants give advice but aren't usually required to have financial-planning certifications--though many of them do. While certifications are no guarantee of skill and experience, certified planners are required to meet ethical and competency guidelines. At Merrill, financial consultants are put through a training program, but it is not nearly as comprehensive as that of a certified planner, who might charge a percentage of assets for his or her services.
Fidelity Investments and Schwab don't provide formal computer-generated financial plans. But they do consult with clients on specific planning issues such as saving for a child's college education, investing for retirement, deciding what to do with a retirement-plan payout, and doing an estate plan. Say you're saving for your daughter's college costs. Fidelity might help you figure out how much you need to save each year and then choose a fund class that historically meets those financial objectives. Both Fidelity and Schwab offer educational booklets, online tools, and retirement-planning software. But, notes Schwab spokesman Tom Taggart, "Schwab won't recommend specific funds, do active portfolio management, or predict market direction."
OVER THE PHONE. Vanguard has launched the most comprehensive program by a mutual-fund firm so far. For $500 apiece, clients can get a one-time analysis for investment, retirement, or estate planning from certified financial-planning professionals. "Our service is not for the person who needs handholding, but for the do-it-yourselfer who is motivated to take action," says John Brennan, president of Vanguard Group. Indeed, there is no face-to-face contact. All consulting is done over the phone, through the mail, or by fax. Of course, the plans only recommend Vanguard funds.
Vanguard provides another option: a fee-based advisory program. Reserved for clients with a minimum of $500,000 in assets, Vanguard will manage a portfolio of proprietary funds for a maximum annual fee of 0.5%. The cost is low compared with the 1% often charged by other firms.
Once a client has a financial plan in hand, the fee-based advisory programs relieve the customer of all investment and management decisions. Called "wrap accounts" at the full-service brokerage firms, this increasingly popular service is sprouting at mutual-fund and Big Six accounting firms. While brokerage firm wrap accounts have been known for high fees and low returns, the mutual-fund copycats have not been operating long enough to have a track record. Fidelity and Strong Funds' clients, with a required minimum of $200,000 and $100,000 in assets, respectively, can have the fund company make portfolio decisions and actively manage the money for an annual fee of up to 1% of assets. But clients are restricted to buying the companies' own funds. Dreyfus and Smith Barney market a similar service that allows clients to choose from other companies' fund families as well.
Schwab and Big Six accounting firms such as Arthur Andersen and KPMG Peat Marwick have less of a vested interest in the products and services a client buys. As a result, they might give more neutral advice than those at brokerage firms that receive commissions and ongoing fees for product sales. While accounting firms have always been in the business of financial planning, they're now registering to become investment advisers for high-net-worth individuals. "We don't manage the assets," says Steven Weinstein, Arthur Andersen's national director of financial planning. "We help clients to manage the process of selecting investments and money managers." Fee structure varies. While KPMG Peat Marwick charges an hourly rate, Andersen's fees are based on an hourly rate and the amount of assets under management.
With Schwab's AdvisorSource program, clients with at least $100,000 are referred to a fee-only investment adviser who trades with Schwab. They pay the adviser about 1% of assets annually for portfolio management. Schwab receives 30% of the fees the first year, which slide to 20% by the third year.
Whether you are seeking financial-planning services or investment decision-making options, it is very important to understand who is giving the advice. Experts agree that consumers now have more choices and that some financial or investment advice is better than none at all. But for a real soup-to-nuts evaluation that includes an analysis of life-insurance options and tax payments or strategic long-term planning, a fee-only financial planner is the way to go. "These institutions are charging two-thirds of what I charge but only doing one-third of the service I provide," notes Judy Shine, a financial planner in Englewood, Colo.
Still, the new operations can be good for financial spot-checks. And some of them are suitable "if you just want one small piece of the financial-planning puzzle," says Robert Veres, editor of a newsletter for financial planners called Inside Information, based in Kennesaw, Ga. In the ever-increasingly confusing world of personal finance, every little bit of advice helps.