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Will Vanguard’s New Hybrid Platform Crush Robos?

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Just a day after it pushed PIMCO out of the top fixed-income fund slot, Vanguard’s new discount advisory service for investors has hit the masses.

Vanguard Personal Advisor Services is a hybrid approach that combines robo-advisor technology and real advisors. It’s been in the works for the past two years and comes to market at a cost of just 0.30%, or $150 per year for a $50,000 portfolio.

“Vanguard Personal Advisor Services represents our continued effort to lower the cost and complexity of investing by giving investors access to affordable, high-value financial advice,” said Vanguard CEO Bill McNabb, in a statement. “Demographic and behavioral trends point to an increased demand for advice, and we believe this new service can help more of our clients reach their financial goals.”

According to Vanguard, its hybrid model marries “the sophistication of digital advice providers with the personal relationship and judgment of a human advisor.”

As investors set up their accounts, they work with an advisor on a financial plan, which takes into account their goals, risk tolerance and time horizon. Later, advisors monitor the portfolio, rebalance it and recommend adjustments periodically.

Clients can speak to advisors via phone, video conference or email after booking an appointment online. 

“We value the role that an advisor plays in helping our clients achieve better results,” said Karin Risi, head of Vanguard Personal Advisor Services, in a press release. “In fact, Vanguard’s ‘Advisor’s Alpha’ research quantifies the key role an advisor plays in constructing a portfolio and serving as a behavior coach. In particular, an advisor can act as an emotional circuit breaker during periods of market volatility, make adjustments to a financial plan when a client’s financial situation changes, and counsel clients on other financial issues.”

For existing robo-advisory firms, Tuesday’s rollout is likely to prove highly disruptive, though it remains to be seen whether or not Vanguard will become the of the online advice industry.

“Many eRIA firms find themselves in a tight spot; they often use low-cost Vanguard ETFs to construct their portfolios and will now have to explain how their service is superior to Vanguard’s,” according to a recent Cerulli report.

Portfolio Power

For the portfolios, the advisors are expected to recommends Admiral shares of Vanguard index and active mutual funds, which have expense ratios of about 0.05% to 0.19%. However, investors have the ability to include existing non-Vanguard holdings in their portfolios.

The robo-advisor in the program is Vanguard Capital Markets Model, a proprietary financial simulation tool. It takes into account factors like market conditions and risk-return assumptions and also “feed[s] into 10,000 simulated outcomes for an up-to-date assessment of how each client is tracking towards his or her goals,” according to the company.

Vanguard says it expects Baby Boomers in particular to take advantage of the new offering. “While Personal Advisor could be valuable for investors at any stage, Vanguard’s experiences with clients has shown that as individuals near retirement and prepare to shift into the drawdown phase, the complexity of their financial situations increase significantly,” it stated.

The fund giant points out that Pew Research Center studies have found that more than 60% of Baby Boomers use advisors to help them with their investment decisions.

In its pilot phase, the new Vanguard service drew over $7 billion in new assets through March 31. The company adds that it also has moved about $10 billion of assets owned by clients of Vanguard Asset Management Services — an existing wealth management, trust and estate planning offering — to the Personal Advisor platform. Overall, Vanguard manages nearly $3.1 trillion in U.S. mutual fund assets.

Competitive Conundrums

Given its hybrid approach, Vanguard’s new program differs from exclusively online programs offered by robo firms like Wealthfront.

Some firms charge as little as 0.25% a year for managing more than $10,000 in assets, just slightly less than Vanguard’s hybrid program. Other online services, like Personal Capital, charge 0.49% to 0.89% for $100,000 and up.

This gives Vanguard an attractive price point, experts say. “It’s low enough for advisors charging 1% to have to explain what they do that is valuable” to warrant the difference of 70 basis points over Vanguard, explained Michael Kitces, director of research for Pinnacle Advisory Group, when the fund giant outlined the program late last year.

Still, he added, it’s “a strange midpoint” that Vanguard is trying to straddle: “This is a disruptor for the financial services industry. Vanguard has a huge self-directed investor base and a huge advisor base that uses their products, too.”

To Kitces, “It feels like Vanguard is figuring out where the balance is in its offerings and how to position itself [to] not conflict with financial advisors selling its products.”

“It will be interesting to see if any other large platform can find a way to compete with the price point, including advisors themselves,” Kitces added.

Recent research from Cerulli Associates indicates that Vanguard’s offering, along with the robo-advisory programs of Charles Schwab (SCHW), will make it tough for existing robo firms to compete.

“Firms such as Vanguard, Charles Schwab and Fidelity possess the resources and talent available to create tax-efficient ETF portfolios, but more importantly, they are able to gather the fee on the underlying ETF,” according to the report. “This helps these firms scale the automated investment model and lower the cost of service to the end client.”

“The firms that will be successful in this landscape will be those large enough to realize the economies of scale necessary to turn a 25-basis-point fee into a profitable business model,” according to Cerulli. 

— Check out Vanguard’s Robo-Offering: Good for Advice, Bad for Advisors on ThinkAdvisor.


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