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Executed almost shyly, the hints-of-vanilla Malvern indexing giant is the unlikely Silicon Valley nemesis in automated services
June 26, 2014 — 3:14 AM UTC by Guest Columnist Michael Kitces
Brooke’s note: The men in black T-shirts from the Bay Area’s Silicon Valley, New York City’s Silicon Alley and whatever the Boston-based tech whizzes are calling themselves these days, are hustling to create a “robo” revolution in financial advice. For the most part, robo is industry shorthand for a place to invest your funds that is making using of technology in such a way as to create disruptive, i.e. low, visible pricing and an online experience in keeping with the world’s top websites. Unofficially it also means that the founders and financiers are not tainted by Wall Street ties and that most of the people working for these firms have never taken a course as financially intense as Econ 101.
Mike Sha of SigFig, Adam Nash of Wealthfront, Hardeep Walia of Motif and Jon Stein of Betterment are making strides with silky technology, low fees, decent hype and the zeal of pioneers. See: Why Mike Sha has a 2015 goal of $1 trillion in robo-assets for SigFig and where Marissa Mayer fits in. But they all face a significant obstacle in their quest for robo-domination: monumental client acquisition costs.
Into that breach quietly thunders an unlikely giant: Philadelphia-based Vanguard Group Inc. See: How exactly Vanguard Group — with a dash of robo and lots of mojo — went from a virtual unknown in wealth management to posing a threat to Merrill Lynch. For these Main Line folks sporting Brooks Brothers shirts and pearls, mortgage on acquisition costs are all but paid off. So it shouldn’t come as a surprise — but does anyway — that Vanguard, with its $1.3 billion of assets as of March 31, launched its own effort last summer overseen by Karin Risi, a 17-year veteran of the company (who I have since interviewed and whose thoughts have triggered a new article soon to come), in a low-key fashion. (It’s noteworthy that other big companies with presumably low acquisition costs and a human element didn’t make it out of their first year: Nestwise and BloombergBlack.) See: A departing NestWise advisor tells what he learned from the whole experience.
So low key, in fact, that the company does not even fully recognize the existence of its own robo effort, calling it a pilot program. What sparked Vanguard to disrupt the Silicon Valley Bambis, according to the company, was a mega-trend unserved. “We’re seeing a growing demand for advice,” says Katie Henderson, spokeswoman for Vanguard. “We saw that there was a big opportunity.” Henderson declined to disclose how many humans are working the scenes of robo-Vanguard. “We believe we have an innovative approach,” she says. “Unlike robo-advisors and e-RIAs, what’s unique about our service is we integrate that human element.”
“Unique” is an overused word favored by corporate publicists (the human element is fully in evidence at robo-cyborg RIA Personal Capital ,which still has fewer than $600 million of AUM, its ADV says) but Michael Kitces sees plenty of potential in what Vanguard is doing with its demi-robo effort and he lays it all out here in this post we are republishing from his blog, Nerd’s Eye View.
As financial planning continues its rise, more and more advisors are getting the CFP certification, and an increasing number of firms — from insurance companies to wirehouses — have added financial planning to their offering to varying degrees. And now it looks like a new player is entering the space, likely to make a big splash: The Vanguard Group.
In fact, the new Vanguard Personal Advisor Services offering may have the potential to do to financial planning what their launch of the index fund has done to investment management: create a core, low-cost, basic “indexing” solution to everyone, above which any advisor must rise to deliver value and justify their cost. And priced at a 0.3% AUM fee with a $100,000 minimum (that may soon drop to $50,000), the “Vanguard Financial Planning Indexing” solution may be very disruptive to both robo-advisors and today’s traditional advisors as well.
Ultimately, this won’t be the end of individual financial planners — in fact, Vanguard’s move, including the decision to use real human advisors who are CFP certificants and not be a robo-advisor — validates the importance of financial planning and the value of getting it from a real human being. Yet at the same time, the sheer size that Vanguard already has creates the potential for it to instantaneously reach the requisite volume of clients to achieve both operational and marketing scale. For individual advisors to survive and thrive, it will become more necessary than ever to gain further expertise, specialize, establish niches, and create ways to differentiate themselves from the new low-cost financial planning “indexing” Vanguard solution. See: Why I find the term 'robo-advisor’ objectionable and unhelpful.
What is Vanguard Personal Advisor Services?
Last year, rumors began to emerge that Vanguard was quietly rolling out a new program called “Vanguard Personal Advisor Services” , which offers a managed portfolio of (Vanguard) funds/ETFs, and access to a designated human financial advisor who is a CFP certificant. The advisory relationship includes an upfront financial plan, an annual review, and updates if/when/as needed as life changes, along with access to the advisor along the way via e-mail, a phone call, or a video conference/chat (as presumably most/all of the Vanguard financial planners will be based in its corporate offices in/around Malvern, Pennsylvania).
But what is perhaps most notable about the offering is its cost: a flat 0.3% AUM fee, with a $100,000 asset minimum (a change from their existing Vanguard Asset Management Services offering with a $500,000 minimum and a 0.7% fee). Thus far, it appears that VPAS is still only available on a “limited” basis, and the “old” Asset Management Services offering (with the higher minimums and price point) is still available. Nonetheless, there are indications that VPAS may roll out more widely soon, possibly with an even lower $50,000 minimum. The Vanguard Personal Advisor Services pilot exists as a unit within the larger Vanguard Advisors division that has $36 billion of assets managed (including $34 billion of discretionary assets).
So what do you get? Personal finance blogger “The Finance Buff” went through the VPAS process, which starts with an electronic questionnaire that covers your personal details, salary and tax information, financial account details (with Vanguard account information auto-populated) and a risk tolerance questionnaire, along with your current savings towards retirement, anticipated Social Security and pension benefits, and your retirement spending goals. Once data is entered, you see a calendar to schedule a time for a 45-minute plan presentation (and receive a draft of the plan in advance to review). The plan draft itself includes detailed portfolio recommendations by account, guidance on whether you’re “on track” for retirement, and the plan consultation talks through these issues and other questions the client may have.
Notably, the Vanguard financial plan does not appear to go in depth into income tax strategies, estate planning issues, or an insurance analysis, nor into cash flow and budgeting issues (except perhaps to the extent those topics are specifically asked about). VPAS appears to be focused primarily around the accumulation and decumulation of assets (leading up to and into retirement), how those assets are invested, and 'ad hoc’ financial planning questions as they arise.
Vanguard vs. robo-advisors?
Given all the recent discussions on the rise of the “robo-advisors,” Vanguard’s new VPAS offering — and its pricing — is significant, as a flat 0.30% AUM fee at $100,000 of assets puts it just barely above the 0.25% charged by Wealthfront and the 0.15% fee from Betterment (given Betterment’s price breakpoint for $100,000+ accounts). Yet while the latter are “just” automated investment services with no access to a human CFP certificant advisor, Vanguard includes (virtual) advisor access as well.
In this context, VPAS is actually most similar to “robo-advisor” Personal Capital, which like VPAS is not really a “robo-advisor” but actually a technology-driven platform for human financial advisors engaged virtually with a similar $100,000 minimum for an advisor relationship… with the caveat that Personal Capital charges 0.95% on the first $250,000, which means Vanguard has just undercut Personal Capital’s pricing by nearly 2/3rds!
Notably, the VPAS offering doesn’t necessarily mean the robo-advisors are doomed. In the case of Wealthfront, it still has unique offerings like its Wealthfront 500 for its more affluent investors (or its recent single-stock diversification service), while Betterment is pivoting towards partnering its vertically integrated platform directly with advisors as Betterment Institutional (not to mention a new retirement income solution for its older clientele) , and Personal Capital still has its unique financial dashboard/mobile app (which in practice is both its differentiator, an operational efficiency, and its implicit marketing program for new client acquisition).
Nonetheless, if access to a full CFP certificant advisor can be had at “almost” the same cost (a 0.05% cost difference on $100,000 between VPAS and Wealthfront amounts to an extra $4/month to talk to a CFP!), the pressure will be on for the robo-advisor platforms to continue to differentiate, and build a unique value proposition that justifies their cost relative to the VPAS offering (especially Personal Capital, which appears to have been undercut rather severely).
The alternative for robo-advisors is to face downward pricing pressure as VPAS puts a new “ceiling” on the price of a “full” virtual advisor relationship (though the scope of Vanguard’s planning still appears somewhat limited), below which the robo-advisors with narrower specialized offerings must compete.
Vanguard vs. human advisors?
Notably, the launch of VPAS – which provides some access to human financial planners at a “robo-advisor price point” — is not just a threat to robo-advisors, it’s also a threat to human advisors, who, like Personal Capital, may find themselves severely undercut on their pricing for offering a similar portfolio-management-plus-financial-planning service.
To be fair, as noted earlier, the scope of the Vanguard written financial plan is somewhat limited to accumulation/decumulation planning and the portfolio that goes along with it. There doesn’t appear to be a lot of focus on income taxes, estate planning, insurance reviews, cash flow and budgeting, or any “life planning” oriented services. As a result, many advisors can still compete on the depth of their financial planning expertise, the comprehensiveness of their advice and solutions, and their specialized expertise serving a particular niche.
Nonetheless, the potential threat to advisors of the VPAS solution should not be ignored. Just as VPAS may set a ceiling on the price a robo-advisor can charge if not offering access to a human (and is certainly a tremendous threat to advisors just charging 1% for a portfolio for index funds with no further value-add!), VPAS will also set a low-cost floor on the basic amount of financial planning service any consumer with a $100,000+ portfolio can get, beyond which other advisors must rise to provide greater value to justify their cost.
In other words, Vanguard may be in the midst of creating the equivalent of a “low-cost index” of financial planning services that forces planners to demonstrate their value or yield to the low-cost solution, just as Vanguard is known for having done with respect to index funds versus active managers. To be fair, the upshot for advisors is that human advice and the complexities of financial planning are an area where sophisticated advisors can add value — in fact, Vanguard’s own research has supported the material value that advisors add outside of the portfolio up to an equivalent of 3% of net returns, in their version of “Morningstar’s gamma research. Nonetheless, the burden of proof may shift to advisors to justify why their financial planning is worth the cost and “better” value than Vanguard’s low-cost “financial planning indexing solution”, just as an active investment manager must justify against Vanguard’s low-cost portfolio index solutions.
Implications of Vanguard’s 'financial planning indexing’
From the broader industry perspective, there are many significant implications to the Vanguard offering.
The first is that Vanguard is clearly acknowledging the value of providing financial planning services as a supplement to asset management alone. To be fair, as noted earlier, Vanguard has been delivering a version of their management asset solution plus financial planning for many years, but the VPAS rollout, with its new lower pricing and minimums, appears to be aimed squarely at a segment of the population that is very underserved by 'traditional’ financial advisors that tend to be product centric or have higher AUM minimums.
Similarly, while Vanguard is certainly not the only company aiming to serve the underserved masses — this cause has also been taken up by “robo-advisor” LearnVest, the Garrett Planning Network, and the launch of our own recent XY Planning Network — the notable distinction is that Vanguard is not offering financial planning on a separate hourly or retainer basis, nor is Vanguard otherwise charging separately or upfront for the financial plan (in fact, their prior service allowed for a financial plan to be purchased for $250 for those under the $500,000 minimum, and that upfront fee appears to be getting removed altogether under VPAS).
Instead, Vanguard appears to be offering financial planning services as a “value-add” to their asset management offering as an asset attraction and retention strategy, in lieu of getting paid for it on a standalone basis. In the midst of an environment where there is a great deal of debate about the viability of offering financial planning attached to AUM, rather than charging for it on a standalone basis, the decision of a firm as large as Vanguard to go this route and view financial planning’s value as being worthwhile for long-term client retention is significant. Similarly, Vanguard’s decision to use human advisors — and not be a pure “robo-advisor” solution — is a notable validation for advisors of the benefits that Vanguard sees in real humans forming relationships with clients, and not “just” offering them automated technology solutions.
While some may suggest that ultimately, Vanguard will suffer and struggle to deliver financial planning affordably at these price points, as many companies have over the years, it’s also important to recognize — as previously discussed on this blog — “that the true “hidden cost” that makes it difficult to bring financial planning to the masses is not actually the cost of the advisors, but the “cost of marketing and other efforts to acquire clients in the first place.. In this regard, Vanguard has an incredible fundamental advantage not shared by any other player in this space: they are already the second largest asset management firm in the US behind Blackrock, with nearly $2 trillion of assets, and a recognized and trusted brand.
In other words, while any/every start-up advisor looking to launch a financial planning firm for the masses will struggle with the effort it takes to find a high volume of clients, there is an absolutely enormous base of current and prospective clients already being reached by the Vanguard brand. The significance of this for Vanguard’s ability to instantaneously reach operational and marketing scale is a very big deal! Not to mention that if they really are able to provide financial planning services with high volume at scale, given Vanguard’s sheer size and mass, the firm may also soon play a material role in 'solving’ the lack of entry level career opportunities and long-term career paths for today’s young financial planners with the hiring they will need to do!
From the individual financial advisor’s perspective, though, the key implication remains that Vanguard may have just started down a path of doing to financial planning what the company has been doing to investment management for decades — set a baseline “indexed” value proposition for a low cost, above which advisors must rise to justify their value relative to their cost.
Given the real world complexities that many consumers face, this will not be a death knell for individual financial planners. But it will pose significant challenges for those who are not using the techniques of robo-advisors to maintain their own operational efficiency, those who are generalists who cannot distinguish themselves in a crisis of differentiation, and those who do not have deep enough expertise to really be able to deliver much more value than Vanguard can for a simple 0.3% AUM fee (perhaps even triggering a backlash from some advisors in response as Vanguard competes against them directly?).
In the meantime, those who have deeper expertise with post-CFP education, along with those who have clear niches, or some other unique value-proposition, will be best positioned to survive and thrive on a differentiated basis.
The bottom line, though, is to watch out for the financial planning juggernaut that Vanguard has just created. Because of Vanguard’s sheer size, it has the real potential to shift the landscape for robo-advisors, human advisors, and the middle market of underserved consumers, all at once.
This was originally published on Michael Kitces’ blog on April 21, 2014.
Michael Kitces is a partner and the director of research for Pinnacle Advisory Group, and publisher of the financial planning industry blog Nerd’s Eye View. You can follow him on Twitter at @MichaelKitces, or connect with him on Google+.
Mentioned in this article:
Top Executive: Michael Kitces
Portfolio Management System
Top Executive: Andy Rachleff
Betterment Holdings Inc.
Financial Planning Software
Top Executive: Jon Stein
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