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.”