Vanguard Bets on Robo-Only Adviser
Vanguard Bets on
Robo-Only Adviser
Money manager is aiming to capture younger, tech-savvy
investors
By Dawn Lim and Anne Tergesen Sept. 20, 2019 10:24 am ET
Indexing giant Vanguard Group plans
to launch a robo-advisory service that cuts out human financial advisers
completely.
Vanguard is pilot-testing the new
platform, in a sign of how the world’s second-largest money manager is aiming
to capture younger, tech-savvy investors.
Vanguard’s robo-advisory push would
increase the competition with companies including Charles Schwab Corp. and
Betterment LLC for the money and data of this younger demographic. The
automatic service would target fees of 0.15%, or $15 for every $10,000
invested, a price that undercuts many rivals. The total cost is expected
to be about $20 on every $10,000 for individual investors once investment fees
on the Vanguard funds the service will use are factored in.
Vanguard will have to contend with
those earlier entrants into the fully automated robo-advisory market. The firm
has also had to invest in improving its technology infrastructure after dealing
with several website glitches in recent years.
The service, Vanguard Digital
Advisor, will be offered to individual investors and members of workplace
401(k) plans when it goes live. The platform, which is only open to users by
invitation for now, was disclosed in a regulatory filing this week. It is
unclear when Vanguard will start to market the service more broadly.
Within the 401(k) market, Vanguard’s new service would be part
of a trend toward offering more personalized portfolios at a low cost with the
aid of technology. The firm is considering ways to allow users to set more
customized financial goals beyond how much they plan to save for retirement.
Vanguard became a roughly $5.7
trillion household name on the back of index funds that track markets and don’t
charge high fees. The Malvern, Pa., firm’s lower costs ignited a price war that
is roiling the money-management world. It is now seeking new ways to press
further into the business of advice-giving and become a bigger force in all
aspects of the financial lives of individuals.
The firm’s new digital service works like this: Users will feed
the system with personal data and financial goals such as how much they hope to
amass by retirement, according to the filing. Algorithms will then construct a
portfolio with risk and return characteristics that it devises as the best fit
for the person. Investors will pay for Vanguard funds used to build their
portfolios as well as the service. The account minimum is $3,000 for individual
investors.
Over time, Vanguard is hoping to add
new functions to the new platform including tools that could help users plan
for college, save for a home or set aside emergency funds, according to the
regulatory filing.
Vanguard already has an offering that
pairs computer algorithm-driven advice with help from about 750 of its own
advisers who give telephone and online assistance. That service, Vanguard
Personal Advisor Services, charges not more than 0.3% for advice, on top of
product fees, and has an account minimum of $50,000.
This hybrid algo-driven and
personal-advice offering has ballooned into a roughly $140 billion advisory
behemoth since launching in 2015, in large part thanks to its efforts to target
existing Vanguard clients. The offering has dwarfed robo-advisory pioneers such
as Wealthfront and Betterment LLC, which each manage about $20 billion. As of
June 30, Charles Schwab’s two online offerings managed $41 billion.
Vanguard would join Schwab and
Betterment in offering different models: a higher-priced one for those who want
human help and a cheaper one for those who are comfortable with a more
automated approach. A pure robo-advisory platform generally targets a
different audience than financial-advisory services that often charge 1% of
client balances and can offer personal interaction with an adviser, including
assurance when markets fall.
Vanguard Chief Executive Tim Buckley
said in an interview earlier this year that technology will continue to drive
down the cost of financial advice.
Tom O’Shea, an analyst at Cerulli
Associates, Inc., said Vanguard’s new service aims to appeal to millennials,
especially those who leave jobs with assets in a 401(k) plan Vanguard
administers and may want to roll the money over to an individual retirement
account.
Vanguard’s push into the business of
digitized advice-giving is being watched closely by wealth managers.
“Vanguard is saying that what can be
automated, will be,” said William Trout, head of wealth management at research
firm Celent. “Even the historically complex and emotion-laden financial
planning process.”
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