Empower vs. traditional financial advisors

Fees typically charged by traditional investment management firms

Let's start with the most obvious difference: fees.

Below is a table comparing the fees charged by the major investment management firms. It reflects not only the basic advisory fee, but also the average fund fee for investments used by that firm. The last column is the one that's most important: Total Estimated Fee.

Investment Management Fees

Notice that the combined fees by the top seven firms range from a low of 1.33% (Merrill Lynch) to a high of 3.50% (Ameriprise). Using the midpoint between the two extremes, we come up with a median estimated fee of 2.42%.

Based on the managed investment accounts I've seen from hundreds of clients during my days working in CPA firms, that midpoint looks representative of typical fees paid.

Now let's analyze how much those fees impact your investment performance. This is strictly an analysis of the impact of investment fees on investment return. It doesn't measure qualitative differences between large investment management firms and Empower. But it does measure portfolio performance, which for most investors is the single most important outcome of professional investment management.

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2.42% versus the 0.97% charged by Empower

For comparison purposes, we'll use the higher fee on Empower, since it will apply to the vast majority of investors. That's a base fee of 0.89% on portfolios up to $1 million, plus 0.08% as the average fund fee, for a total of 0.97%.

Just looking at the two numbers side by side, it's easy to see how the difference in fees can impact your investment portfolio. But let's take it a step further and look specifically at how the fee difference will affect your investments over the long term. We'll look at three different timeframes: 10 years, 20 years, and 30 years.

Let's assume you have an initial investment of $100,000. We'll also assume you make no additions to your portfolio. Let's say you can expect an average annual rate of return of 7%, blended between stocks and bonds.

Subtracting the total fees from that return, large investment management firms will return 4.58% per year (7.00% minus 2.42%). Empower will have an average annual return of 6.03% (7.00% minus 0.97%).

How do the two stack up?

After 10 years

• Large investment management firms: $156,490
• Empower: $179,592
• Difference: $23,102

After 20 years

• Large investment management firms: $244,891
• Empower: $322,534
• Difference: $77,643

After 30 years

• Large investment management firms: $383,230
• Empower: $579,246
• Difference: $196,016

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The cumulative impact of higher investment management fees

Since the difference in performance over each term is comprised entirely of investment fees, it means the reduction in investment value being experienced by the investor is represented entirely by income for the investment manager. In the case of the 30-year example, the difference of $196,016 is comprised entirely of additional revenue to the investment advisor.

Perhaps the large investment management firms do provide a higher level of service. But a price must be put on that service level. Is it worth nearly $200,000 over 30 years?

The example above is a conservative one. Most investors who make use of investment management will invest a whole lot more than $100,000. That being the case, the differences in investment returns over the long term will be much greater.

Empower

Rating: 4.8/5

Quick Summary: Minimum Investment: $100,000

Fees: Wealth Management: First $1 million: 0.89% ; $1-3 million: 0.79%; $3-5 million: 0.69%; $5-10 million: 0.59%; Over $10 million: 0.49% Platform: Apple, Android Visit Empower

What do you get for the higher fees?

Investment advisors that charge higher fees operate under the perception that they provide higher investment returns as a result. However, there is no evidence of this outperformance over the long term. Since virtually all investment advisors essentially track the broad market indices, the level of fees charged becomes the major variable, potentially reducing investment returns as a result (as shown in our analysis above).

That being the case, what are the services provided by high-fee investment managers that might give them some sort of advantage over lower-cost providers, such as Empower?

Let's take a quick glance at the primary services provided by the three investment managers that charge the highest fees:

Ameriprise Managed Accounts and Financial Planning Service

• Comprehensive financial planning — extends to other financial needs, such as various insurance products and annuities.
• Work with a dedicated financial advisor. The advisor can provide you with either investment assistance or complete investment management. The advisor can also provide custom guidance to help you deal with market turbulence or major changes in your personal situation.
• A customized financial plan, including setting goals and creating strategies to meet them.
• An online account where you can trade investments, transfer funds and pay bills, and contact your advisor at any time.
• Create retirement plans for your business, including 401(k) and 403(b) plans.

UBS Portfolio Management Program

• Work with a dedicated financial advisor who will help you achieve your financial goals and even make borrowing decisions. He or she will have the discretion to buy and sell securities in your advisory account.
• Estate planning, including the use of trusts and insurance policies.
• Goals-based wealth management, focusing on liquidity (meeting near-term financial needs), longevity (investing for life), and legacy (strategies for what you'd like to leave behind).
• Cash management services, including the availability of certificates of deposit and a Visa credit card.

Morgan Stanley Select UMA Program

• Provides one account for all your holdings in separately managed accounts, mutual funds, exchange-traded funds (ETFs), and alternative investments.
• Tactical and strategic asset allocation models, from conservative to aggressive. Customized asset allocation allowing you to integrate with other investment strategies. Tactical asset allocation represents shorter time horizons and are actively managed based on which asset classes are likely to out-perform or under-perform in the next 12 months.
• Professional overlay portfolio management, including automatic rebalancing and optional tax management using tax-loss harvesting and other techniques.
• Work with a dedicated financial advisor who can make decisions for your account or simply provide you with advice to make your own investment decisions. Either you or your financial advisor can manage your portfolio.

Summing up the service levels of the highest cost investment managers

The consistent theme among the highest-cost investment managers seems to be diversified services. They handle not only investment management but also related financial areas, such as estate planning and insurance.

Their services are clearly aimed at higher-net-worth clients who may be looking for hands-off comprehensive financial management. But each company offers different levels of services, and there are often additional fees with each service, not reflected in the advisory fee.

These services seem to be best suited for high-net-worth individuals who are mostly concerned with nonfinancial activities, such as running a business or tending to major personal commitments that leave them little time for financial matters. In exchange for higher fees, the high-cost providers offer the various ancillary services, which may offer additional justification for the higher investment management fees.

However, it's important to emphasize that those additional services don't have an impact on investment performance, though they may provide valuable benefits that have the overall result of improving your financial situation. For example, through financial planning, any of these high-cost providers may let you to develop a larger estate to leave to your heirs, through a combination of insurance and the creation of trusts.

What about Vanguard?

In the analysis above, we focused primarily on the seven firms charging the highest investment fees. But what about Vanguard, which has lower investment fees than Empower?

Vanguard has the lowest total fees at 0.30%, which would seem to make it the best-managed investment option. However, as noted above, total investment fees do not reflect the variable of specific investments held within an investment portfolio.

As the world's largest mutual fund provider, Vanguard naturally invests heavily in its own mutual funds and ETFs. Since some of those funds carry load fees (of between 1% and 3%), the cumulative effect of those fees, when added to other investment fees, likely makes the actual fees paid considerably higher than the 0.30% indicated.

This means there are fees included with Vanguard that are not reflected in their total advisory fees. In a year involving fairly active trading, those fees can be substantial and thereby reduce long-term investment returns.

What does Empower offer with its lower fees?

So what differentiates Empower from its higher-cost cousins?

Empower Wealth Management is an investment manager, not a broker-dealer. It does not offer proprietary products and services, and many of the higher-cost investment managers are broker-dealers. They can earn extra fees by selling securities, like mutual funds. They may earn additional fees selling you proprietary funds and insurance instruments.

Unlike Empower, they're not held to a fiduciary standard. Empower is a Registered Investment Advisor (RIA), which means it is legally bound to act in their clients' best interests (the fiduciary standard). RIAs typically charge a flat fee and earn no additional income from transactions.

• Access to financial advisors: If you have at least $200,000 managed through the Wealth Management program, you'll have access to two financial advisors. This will give you live advice, comparable to higher-priced investment managers.
• Tactical weighing of investments: The higher-fee firms do this as well. Empower does this by more evenly weighing exposure to every sector and stock. Backtesting has indicated the strategy outperforms the S&P 500 by more than 1.5% per year.
• Investment mix: Empower uses Modern Portfolio Theory to build your portfolio. It will use a combination of up to 120 individual stocks and low-cost ETFs. Your portfolio will be diversified to include both domestic and international stocks and bonds, and alternative investments (such as real estate investment trusts (REITs), gold and energy), as well as cash.
• Portfolio custodian: Since Empower is not a broker-dealer, it doesn't actually take possession of your portfolio. Instead, your account is held with Pershing Advisory Solutions.
• Other investment methodologies: Empower Wealth Management offers periodic rebalancing as well as tax minimization strategies (in taxable accounts), including tax allocation and tax loss harvesting.

Larger portfolios = higher service levels

Thus far, we've been concentrating on Empower Wealth Management, which is designed for investors with portfolios between $200,000 and $1 million. But Empower offers three service levels based on portfolio size. As you can see from the screenshot below, Empower Private Client offers investment and financial service comparable to higher-cost investment advisors:

Empower Investment Management Options (Source: personalcapital.com/wealth-management)

In general, Empower provides identical investment management services to the higher-cost providers. But it does something the others don't necessarily do. It recognizes investments that are not directly managed by the firm. For example, Empower will take your employer-sponsored 401(k) plan into account in creating your investment portfolio. It doesn't directly manage that account, but it will provide recommendations to help you improve your performance within the plan.

This holistic view of all your investments helps to avoid duplication of investment and excessive allocations in specific sectors.

Other Empower services

Empower provides related financial services, just like the high-cost investment managers do.

Budgeting: Empower's free version provides budgeting. This lets you track your spending, create income and spending reports, and even track your net worth on an ongoing basis.

The platform acts as an account aggregator, where you can include all your various financial accounts. This includes not only your Empower Wealth Management account, but also bank accounts, credit cards, loan accounts, mortgages, employer-sponsored retirement plans, and investment accounts not managed by Empower.

In this way, you can have all your financial accounts assembled on a single platform, but not controlled by Empower. It allows you to maintain accounts with the institutions of your choice rather than using the everything-under-one roof concept (investments, banking, insurance, and financing through the same institution) employed by high-fee platforms.

Investment checkup: This tool analyzes your portfolio and recommends strategies to help you improve your performance and reach your goals. It can help you manage investment accounts not directly managed by Empower.

Fee analyzer: This tool provides an investment X-ray. That is, it allows you to identify hidden investment fees, particularly in funds. It will also recommend alternative investments with lower fees. This will be particularly valuable in accounts not managed by Empower, such as your 401(k) plan.

Retirement planner: This actually provides several tools, including the Retirement Calculator. It lets you track your progress toward your retirement goals. That will give you the ability to make adjustments to get you back on track. The retirement planner even lets you calculate your projected Social Security benefits and accounts for both pensions and rental income.

Summing up how Empower compares and contrasts with traditional financial advisors

As you can see from our analysis, the difference between Empower and traditional high-cost financial advisors is actually quite small. Traditional financial advisors attempt to take greater control of your entire financial situation, largely by offering in-house products and services.

Empower works much the same way, except that it has no in-house products or services. Instead, it works primarily as a wealth management service. It offers a variety of free tools to help you better manage your finances on your own. Meanwhile, you're free to maintain different accounts with various institutions, while aggregating them on the Empower platform. This will give you a high altitude view of your total financial situation, as well as greater control of all the details.

And best of all, Empower's Wealth Management works on a fee that's only about one-third that of the typical high-cost traditional financial advisor. For that reason, you're likely to see greater long-term investment gains than you will with the high-cost providers. And along the way, you'll retain greater control over your personal financial situation.

Based on our analysis, Empower Wealth Management will better serve the needs of the majority of large investors than the higher-cost traditional financial advisors will.