Rebalance IRA: Advice At The Right Price

October 09, 2013

Another low-cost firm makes fee compression in the advisory business all the more real.

Silicon Valley-based Rebalance IRA is the latest example that the low-cost revolution in the financial services industry is spreading more and more into the advisory business itself. The firm, which launched this year and is fast approaching $200 million in assets, has also brought indexing legend Burt Malkiel on board as an advisor to help it devise asset allocation schemes. Malkiel, readers may recall, also serves as chief investment officer of Wealthfront, another California-based low-cost advisory firm.

Mitch Tuchman, Rebalance IRA's founder, told IndexUniverse Managing Editor Olly Ludwig that his firm's all-in fee of about 70 basis points, or $70 for each $10,000 invested, reflects cheap all-ETF portfolios in the individual retirement accounts (IRAs) it manages, as well one-on-one advice for clients large and small that's aimed at teaching them the simple modern portfolio theory (MPT) gospel of buying, holding and rebalancing. What's going on in the advisory business that makes a business plan like Rebalance IRA's a realistic proposition?

Tuchman: What's going on in the advisory business is that the advisors who have built companies in that space have business models that will not accommodate an investor with $100,000. And No. 2, the fees they're charging, even at 1 percent, are too high—they seriously impair investor returns. So their model is too expensive, with too-high minimums. We believe their approach to investing—which is largely active management and stoking the greed fires—is just a very bad model. You talk about modern portfolio theory on your website. I figured I would encounter that, especially if Burt Malkiel is involved. Is it fair to say that MPT is exactly what your firm is about, or with a twist?

Tuchman: Yes. Straight ahead. I don't know what you mean by a "twist." If you were to say modern portfolio theory, you could buy two funds: a global equity fund and a global bond fund. Our twist is, sure, we have a small-cap tilt; we have a few of those things. But our portfolios are generally 10 ETFs, and they're the broad asset classes. And they're designed based on the investor. Let's talk about fees.

Tuchman: Let's look at all the fees, because people get very confused. If you get down to it, there are three fees the financial services industry attempts to extract from people's accounts: a) transaction fees or commissions; b) fund fees; c) and then the advisory fee on top of that—my fee for assembling and managing and rebalancing the portfolio. These fees add up all around. And in general, it's averaging 2.5 percent in a retirement account, and we've seen it as high as 3 percent, but rarely do we see all-in fees below 2 percent.

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