Advisers worried flat-fee plans will flatten fees

Research indicates that investors whose accounts are too small to get much time from their advisers want more individual attention. Mass-customized investing services say they have a way to do just that. But so far, mainstream financial advisers aren't biting, mostly out of fear that such services might put pressure on their own fees. In a recent study of older investors conducted by research firm Hearts & Wallets, low-account-value investors said they believe that their questions on retirement and income planning usually are answered as a “prelude to a sale.” Respondents also questioned the “potential hidden motives of brokers because they may be receiving commissions from product manufacturers.” Not surprisingly, Chris Brown, a principal of Hearts & Wallets, said a growing “disconnect” exists between what low-account-value investors want and what they are getting. His firm predicts that investment advisers increasingly will offer discount options to these clients, such as Merrill Edge, an online discount option offered by Merrill Lynch & Co Inc. One independent adviser is rolling out his own program to fill that need. Flat Fee Portfolios, launched by well-known adviser Mark A. Cortazzo, offers investors with $150,000 to $500,000 accounts “mass customized” services for a flat monthly fee. The service costs $129 for accounts below $250,000, and $199 for larger accounts, up to $500,000. Clients who sign up are assigned a financial adviser who guides them through a risk assessment to place them in one of 36 model portfolios for retirement and taxable accounts. Mr. Cortazzo, senior partner of independent adviser Macro Consulting Group, launched the offering in February and has collected a handful of retail clients. He is also reaching out to advisers who might like to shed accounts that fall below their minimums. For these advisers, “you end up like a diner, trying to cook everything for everybody,” Mr. Cortazzo said. “It is difficult to manage an $180,000 account profitably in this environment.” He estimates that advisers in this situation typically have a dozen to 20 accounts in this size range that he would like to buy in return for a revenue-sharing deal for the first two or three years after acquisition. So far, he hasn't had any takers. Advisers typically are leery of these flat-fee offerings because they worry that “in the long run, it will put pressure on fees,” said Robert Fross, a principal with Platinum Advisor Marketing Strategies LLC, a marketing consulting firm for financial advisers. He believes that the worries are overblown, however. Cut-rate offerings probably won't appeal to investors with larger accounts who want the more-personalized service they get with a financial planner, Mr. Fross said. As for those with smaller accounts? “There will always be do-it-yourselfers who balk at paying 1%,” he said.