Vanguard CEO William McNabb’s frank assessment of industry change, new regulations and the future of fees captivated the crowd at the Morningstar conference in Chicago on Wednesday. For the most part, he said, the DOL got it right with its fiduciary rule, that robo-advisors are here to stay and fees will continue to drop.
Interviewed by Morningstar’s Jeffrey Ptak, head of Global Manager Research, McNabb spoke openly about several subjects, providing his opinion and forecasts on the business. Here are some of the highlights:
Ptak opened with getting Vanguard’s view of the new DOL fiduciary rule. McNabb noted that it was a “huge topic,” but said, “it ended up about as well as can be expected. Earlier versions concerned us as they especially impacted the smaller, less affluent client in the 401(k) space.”
McNabb gave credit to the DOL for taking into consideration all viewpoints from comment letters on its proposed rule, and though the final version is not perfect, “it is workable and implementable and actually net-net it will be a positive thing for the industry in the long run.” He believes one of the cons is that the regulators didn’t come up with a single definition of fiduciary.
He also noted Vanguard is not party to any of the pending lawsuits and is going ahead with assuming the DOL rules will remain as written. He said Vanguard was already a fiduciary due to its advisement work, but the one area of concern was 401(k) materials, which he thought could be tweaked to be in compliance. He also noted they would have to “do some things differently” with IRA rollovers.
He highly recommended that advisors don’t wait to see what happens to the court cases, and instead move ahead with plans to be compliant. He said once again, “Change is around the IRA market, and that’s where I would turn my attention.”
Vanguard was on board early with robo advisor technology. “We got an inside look early and were very impressed with where these firms were taking the technology and [how they were] really thinking about automation of advice in different ways.” He said that’s how Vanguard’s digital advice platform Personal Advisor was born, which he describes as “a hybrid.”
Today the firm uses robo-tech for smaller accounts, those in the $50,000 to $200,000 range. It launched Personal Advisor in May 2015, and to date it has $40 billion in AUM. McNabb admitted $10 billion of that was from clients who moved money over from other Vanguard services. However, $30 billion is new money from mostly existing clients, he said. Personal Advisor charges 30 basis points, which can go down depending upon the amount of many managed. Again, he strongly advised the audience to adopt new technology. “Rather than push back on technology, find ways to benefit yourself,” he said. “The hybrid model will be the winning model.”
Technology also led to a discussion on fees. McNabb sees a “big secular change going on” as the industry moves from transactional to a fee-based advisory. “And part of that is a continuing reduction of fees,” he said.
Admitting the fee reduction forecast could be the “least popular thing someone will say on stage” at the Morningstar conference, he suggested “one of two things will happen and probably both: a high probability fees go lower, or you’ll do a lot more for what you charge. It’s inevitable,” he said. One area that hasn’t yet seen much pricing pressure “is distribution, and advice [is] next. It will get competed away to a degree.”
When asked how he envisioned Vanguard in 10 years, he said, “We will be far more global, not only in client reach but how we run things. We’re already moving pretty aggressively down that path where we run our investments on global basis. Our CIO has established teams in the Pacific and Europe. And we now run money 24/7 for our clients. Our global footprint is $300 billion in non-US investment. We see tremendous appetite for what we do. There’s [an international] need for lower cost, broader products, and thoughtful research, which we think we can provide.”
He said that on the product side Vanguard would offer more tools for advisors to “create holistic portfolios to deal with a drawdown phase,” which he believes will be the norm in the next decade. He also believes advisors should prepare clients for a lower return environment. Finally, he said that in going global, Vanguard would rely more on telephone and simplification to communicate since our “PC-centric tech world doesn’t exist elsewhere.”
One thing he promised advisors won’t see in Vanguard’s future: branch offices or named rights stadiums.
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