The Truth About Investment-Fee Rebates

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Who’s that Man, Daddy?

You’ve seen those Schwab commercials on TV where the dad explains to his child what his broker does. These ads are promoting a ‘money-back’ guarantee if clients aren’t happy with the advice. I just wrote an article published in Bottom Line Personal today explaining how that guarantee works.

 


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A money-back guarantee might seem like an enticing assurance that a product or service is reliable. But when it comes to choosing an investment firm, it’s not very useful. Charles Schwab has been offering to refund investment advisory fees when investors are unhappy, and TD Ameritrade has been offering to rebate the fees after two quarters of negative performance. As I have traveled around the country, some investors have expressed excitement to me over these offers.

The problem: Many investors mistakenly believe that they will get better advice because of the offers and will be protected from investment losses. The guarantees are not a good reason to select a particular brokerage or a useful way to judge the value of the help you get.

How the offers work: Schwab’s ­“Accountability Guarantee” allows customers who use any of five advisory services to request a refund of fees for the previous quarter for any reason. The services include Schwab Managed Portfolios, whose model portfolios of mutual funds and exchange-traded funds (ETFs) are selected with the help of an adviser (minimum investment $25,000), and Schwab Private Client, which provides an adviser who creates a portfolio tailored for you (minimum investment $500,000). Annual fees are 0.9% of your managed assets or lower.

TD Ameritrade’s “Discretionary Service Fee Rebate” applies to its Amerivest service, which provides an adviser to help you select among several model portfolios. If your holdings experience two consecutive quarters of negative returns, Amerivest will automatically refund the fees from both quarters. Amerivest requires a $25,000 minimum investment and charges an annual fee of up to 1.25% of managed assets. The guarantees do not reimburse investment losses.

My take: Schwab and TD Ameritrade are worried about losing clients to much-lower-cost services known as robo-advisers offered by firms ranging from online newcomers to giants such as Vanguard and Schwab itself. Robo-­advisers generally charge 0.35% or less to generate model porfolios of ETFs—­although most won’t put you in touch with a human adviser.

But a money-back guarantee is not helpful in choosing the best human adviser. It’s better to look for advisers with long, solid track records. And you should avoid judging their advice based on your portfolio’s returns from one quarter to the next.

8 Comments

  1. John Meyer says:

    I believe the father / son commercial is for Schwab which offers a refund for being “unhappy”. I have not seen the one from Ameritrade for refunds for negative performance. Will they increase your fees if you start to get multiple outperformance years?

    • Pam Krueger says:

      Dear John, It’s not a full refund of the fees anyway. They’re all just trying to get the transparency message out. And no, they’re not asking investors to pay more for delivering alpha which as you know, so few can consistently outperform. Robo’s have lowered the cost of investing down to almost zero. For consumers, it’s about the value the advisors bring to the table in terms of advice to keep them from losing money and overall ‘planning’ versus betting that any advisor can beat the market.

  2. With held says:

    As an advisor for over 35 years I applaud the lower cost of robo advisors, etfs and others. The problem that plagues my industry is that a good advisor delivers significant value but we expect the fee on the investment aspect of our services to bear the entire cost of the relationship. A true, comprehensive advisor is not comparable to an asset allocation service like a robo advisor or a model portfolio. Estate planning, retirement planning, cash flow projection, risk tolerance determination, hand holding, insurance planning, education funding etc etc are not part of a model portfolio. My hope is that the industry will move toward disaggregation like is currently taking hold in the family office space. A good example would be an annual fee of 25 bps for model portfolios, 50 bps for custom portfolios, 35 basis points for wealth management or financial planning, 10 bps for cash management etc. This approach could help consumers get exactly what they need instead of making the mistake of thinking portfolio management fees are the only consideration.

  3. Doug says:

    Why is this not a violation of FINRA rules? It would seem to me that this would be sharing in loses and therefore be prohibited. How are they getting around FINRA 2150?

  4. Rick says:

    Excellent question from Doug. I am interested in your response.

  5. Brian says:

    Same here, why is this practice not violating FINRA regs?

    • Pam Krueger says:

      Brian,

      That’s the million dollar question that has the whole industry up in arms. The DOL released its final rule in April 2016. The rule mandates financial professionals who service individual retirement accounts, including IRAs and 401(k) plans, to serve the “best interest” of the savers and disclose conflicts of interest. FINRA and all the brokerage and insurance industry lobbyists, of course, are fighting this. The rule’s now in limbo, but remember this: With or without a rule, consumers have all the power. They can choose a fiduciary advisor or not. It’s totally up to the consumer to get educated. This is why I limit the advisors on Wealthramp to only those willing to accept fiduciary responsibility, and put that in writing.

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