(US News) Some tech entrepreneurs believe every business will become a subscription model in the future.
In a recent interview by Jenny Luna for Stanford Business, Tien Tzuo, founder and CEO of Zuora, believes that the subscription model is the wave of the future and benefits corporations with a steady revenue stream. He suggests that any business can use this model.
A do-it-yourself investor, might begin with several thousand dollars and invest in stock and bond funds at Charles Schwab, Fidelity Investments, TD Ameritrade or another investment house. As the portfolio grows to five figures, the DIY investor may seek other financial guidance. That's where low-cost financial planning comes in. In contrast with typical human advisors who require hundreds of thousands of dollars and charge 1% or more in management fees, paid subscription robo advisors offer a low-cost alternative.
Here are few things to know about robo advisory subscriptions:
- You may only pay a flat fee.
- The fees tend to be low.
- It appeals to young investors.
You May Only Pay a Flat Fee
Subscription-model adopter Schwab Intelligent Portfolios Premium robo advisor believes this payment structure is great for investors. In a shift from the former management fee of 0.28%, Schwab now charges a $300 set-up fee and $30 monthly, whether an investor has $25,000 or $2.5 million invested. In contrast with the zero management fee that Schwab Intelligent Portfolios, its premium version provides unlimited access to financial advisors and comprehensive advice.
For smaller investors who invest a minimum of $25,000, the $30 per month fee equates to a 1.44% assets under management fee, a hefty charge. Once assets under management reach a certain threshold, consumers enjoy premium investment management at a bargain price. As assets grow, the online financial advisor fee is economical. The investor with a $500,000 portfolio pays a management fee of 0.07%, a real bargain when compared to the average advisory fee of 1.02% charged by most financial planners.
Fees Tend to Be Low
The basic Schwab Intelligent Portfolios levies a zero account management fee. While Schwab Intelligent Portfolios Premium is the only robo advisor with this pricing platform.
The DIY investor can benefit from low-cost robo investing. With several zero management fee investment managers such as M1 Finance, WiseBanyan and Schwab Intelligent Portfolios basic service, DIY investors receive portfolio rebalancing and other basic services and pay only the underlying exchange-traded fund management fees. Investors with M1 Finance can even buy stocks without paying a commission.
Online financial advisors with automated investing offer low-fee investment guidance. Fidelity Go, Fidelity's robo advisor, invests with zero fee mutual funds. But the digital robo advisor platform charges 0.35% fee for all accounts.
Vanguard Personal Advisor Services charges an affordable 0.3% fee for all accounts and includes financial advisors for all who invest. The catch: Investors need to invest at least $50,000.
DIY investors seeking on-call financial advisors and willing to pay a small subscription fee for features such as tax-loss harvesting and financial advisor chats may overtake the traditional financial advisor model. In fact, robo advisors have already democratized the investment industry by forcing down investment and fund management fees.
Appeals to Young Investors
Consumers are accustomed to subscribing for many of their life needs. The subscription model seems to be the wave of the future. A subscription model is perfectly crafted to serve the younger generations with on demand money management for a small monthly fee.
Experts say consumers are becoming accustomed to subscribing versus buying. For instance, Microsoft Word, Quicken Personal Finance, Stitch Fix (ticker: SFIX), Massage Envy, to name just a few.
“Subscriptions from a younger customer perspective are far easier to understand than basis point or percentage-based pricing. The idea of an all-you-can-eat fee is familiar to a generation of customers who have Spotify (SPOT) and Netflix (NFLX), but comparatively have very little in the way of savings,” says Simon Taylor, co-founder at 11:FS.
Although Schwab may be the first mover in robo advisor subscription models, the XY Planning Network adopted the subscription financial planning model years ago. XY Planning Network's CEO Alan Moore created a platform to help financial advisors build a business by charging consumers a monthly fee. The network helps clients because they can call their advisor at any time with questions, without fear of a bill. Plus, investors don’t need a six-figure portfolio, which is required by many financial advisors. Since the advisors are paid a monthly fee, investors typically begin investing with smaller amounts.
Overall, the subscription model is a win-win, for both consumers and businesses. For investors, subscription investing isn’t intimidating and allows newer investors to get into the markets, while the company gains a predictable revenue stream, Taylor says.
Charlie Haims, former director of product management at Charles Schwab Bank and current vice president of marketing at MyVest, sees the Schwab move as the wave of the future.
“Schwab continues (to be) a bellwether and has a history of making big strategic moves that the rest of the industry adopts," he says.
Schwab's innovations include its no-fee mutual fund supermarket and its registered investment advisors platform.
"This move toward subscription pricing will be another one of those catalysts," Haims says.
DIY investors with larger portfolios, who invest part of their portfolio with Schwab Intelligent Portfolios Premium, have an opportunity for professional investment management and financial advisor access for an affordable monthly fee.
Ultimately, merging financial planning and ongoing investment management will generate better outcomes for investors and their advisors.
