Vanguard’s plan to introduce a digital-only robo-advisor called Digital Advisor has the potential to transform an already very competitive market.
The all-in price for the automated planning and investment service, which includes the expense ratios of its ETF options, will make it cheaper than most all-digital robos — an expected 20 basis points — and its minimum at $3,000 will be smaller than most, though not all.
That compares to a 35 basis-point all-in cost for Fidelity Go; a 25 basis-point advisory fee for Betterment and Wealthfront, which have minimums that are negligible (zero for Betterment and $500 for Wealthfront); and 30 to 35 basis-point advisory fee for digital-only robos from Morgan Stanley, TD Ameritrade and TIAA, which all have $5,000 minimums.
With the exception of Fidelity Go and JPMorgan’s You Invest Portfolios, which charge 35 basis points, these other robo-advisors charge investors additional fees for the investments, usually ETFs, in their portfolios. The average weighted expense ratio of their portfolios is 11 basis points or less, according to The Robo Report, which bases its figures on a roughly 60/40 stock/bond allocation. (You Invest Portfolios has a $2,500 minimum; Fidelity Go has none.)
Only Schwab Intelligent Portfolios, which has no advisory fee and a $5,000 minimum, comes close to Vanguard’s Digital Advisor offering in terms of cost. Its average weighted expense ratio is 14 basis points, according to Schwab. (The Robo Report has it as 21 basis points.) Schwab will also be its nearest competitor in terms of assets under management, which are around $40 billion.
Vanguard, the Disruptor
True to form, Vanguard will be disrupting the robo-advisory space as it did the mutual fund industry when it introduced the first U.S. stock index more than 40 years ago and to a lesser extent, the financial advisory industry years later with its Personal Advisor Services launch, in 2015.
The hybrid PAS, which combines automated advice with a human advisor, now has about $140 billion in assets under management, many more times the assets of any competitor. Its 30 basis-point fee is roughly the same as the digital-only offerings from the big BDs and independent standalone robo-advisors, but its minimum, at $50,000, is much higher.
“Anytime Vanguard enters an industry it’s a big deal,” said David Goldstone, head of research at Backend Benchmarking, which publishes The Robo Report. “It’s like watching Amazon get into a business.”
Vanguard is a behemoth, with $5.6 trillion in global assets and more than 20 million customers worldwide, many of whom could sign up for the new all-digital service. And “unlike Schwab, Fidelity, TD Ameritrade and others, it doesn’t have to worry about getting complaints from its captive advisor network, since its links to the advisory community, outside of mutual fund sales, are anemic,” says Will Trout, head of wealth management at Celent, a global research firm.
Goldstone expects the launch of Digital Advisor will have the biggest impact on Schwab, Fidelity, TD Ameritrade, Betterment and Wealthfront and he’ll be especially watching to see if Betterment and Wealthfront cut their fees. “On a service level Betterment and Wealthfront continue to stay a step ahead, but we haven’t seen Vanguard yet.”
Trout sees the launch of Digital Advisor “as having the potential to send reverberations across the entire wealth management ecosystem, with effects felt by everyone from bank brokers to standalone robo platforms like Betterment and Wealthfront.”
More Pressure on Fees
“Fee compression is in the works, and everyone here is vulnerable, including RIAs,” Trout says. “The commoditization of the robo business (whose avatar is Schwab, with its zero fee Intelligent Portfolios program) is now playing out in the planning space.”
Trout sees Fidelity AMP (Automated Management Platform) and Schwab Intelligent Portfolios Premium, which both combine digital and human advice, as ultimately the big targets of Vanguard’s Digital Advisor. Those two hybrid robos already have competition from Vanguard Personal Advisor Services, but even that could grow as a result of Digital Advisor.
Digital Advisor could serve as an “on-ramp to Personal Advisor Services,” attracting those investors who want the help a human advisor, says Alex Crisafi, a research analyst at Backend Benchmarking. When Digital Advisor debuts, those investors who don’t have the minimum $50,000 to invest with Personal Advisor Services can sign up for the digital-only service and move up to its PAS when they do.