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Bill McNabb declares 'bull market' for RIA advice then downplays role of Vanguard Personal Advisor Services

The Vanguard CEO sees new era of 'advisor alpha' facilitated by software and low costs

Tuesday, January 26, 2016 – 12:56 AM by Brooke Southall and Graham Thomas
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Bill McNabb told Inside ETFs' audience that Vanguard's RIA is mostly only advising people with $50,000-level portfolios.

Brooke’s Note: Thanks to Graham Thomas for relaying information about this speech from an event in Florida. I wrote the article here in California. As Vanguard Group becomes one of the largest RIAs, with about 250 employees, in addition to serving as the planet’s indexing giant, we’re keeping an eye on how it positions itself publicly in each channel. Reports are that the speeches coming out of Florida are, unlike the weather back home, very dry. After McNabb spoke in somewhat Saharan style, DoubleLine’s Jeffrey Gundlach was Kalahari-ish — doing little but disingenuously railing against Fed policy. As Pete Seeger intoned: When will they ever learn?

Vanguard CEO Bill McNabb declared a new era of financial advice but added that the wildfire growth of his giant RIA is not really what he was referring to.

In the opening keynote speech at ETF.com “Inside ETFs” conference, the head of Malvern, Pa.-based passive asset manager — the world’s largest — said that changes in technology and cost structure have created a “moment” for financial advice.

He also said that the cost added by asset managers to RIA portfolios has fallen to .5% from .88%

Vanguard has a study showing that RIAs can create an advisor alpha of 3%. “Alpha” is essentially the returns added above what would be realized by simply buying the market.

The conference is being held this week at the Diplomat Resort and Spa in Hollywood, Fla., a ways up the road from Miami Beach. Most of the expected 1,700 conference-goers had arrived by Monday — despite delays caused by the monster snowstorm that roared up the East Coast over the weekend.

How affluent?

McNabb’s declaration of bullishness about the financial advice business from a Hollywood, Fla. stump comes at a time when Vanguard’s own wealth manager, Vanguard Personal Advisor Services, is demonstrating growth never seen before in an advice, bringing in $1.6 billion per month..

Still, in response to an onstage question from Matt Hougan, CEO of ETF.com, at the event, McNabb said his remarks were not based on VPAS, which he characterized as a service for the mass market and whose average account is $50,000 in assets. See: What Vanguard revealed under webcast pressure about its phono-robo’s vulnerability.

This assertion that VPAS exists in a realm of such small account balances raised eyebrows because in previous interviews, Vanguard executives said that VPAS was drawing large numbers of larger mass affluent accounts and even the accounts of ultra affluent investors. 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.

In addition, its ADV shows that as many as 25% of its RIA managed assets are from high-net-worth investors and approximately $11 billion of VPAS’s assets are considered as “old” assets because they have been transitioned from the firm’s previous program, Vanguard Asset Management Services. The minimum asset buy-in for the legacy service was $500,000.

Full-service service

On the other hand, its ADV says that 76% to 99% of its investors are not high net worth and that fewer than 10% are high net worth.

What McNabb seemed to point to, rather than VPAS, is his firm’s recently published research showing how advisors can add up to 3% in net portfolio returns over time for their clients with Vanguard Advisor’s Alpha, a trademarked process that includes portfolio construction, behavioral coaching, asset location, and other relationship-oriented services.

“These elements create real value for clients,” McNabb said in a statement prepared for the speech. “It’s a truly compelling story.”

The speech elicited no questions from the audience of about 2,000 people.

Vanguard qualified its “advisor alpha” pegging at 3% by issuing the following caveat: “This research isn’t an exact science. The potential earnings of up to 3% more aren’t added over a specific time frame but can vary each year and according to your situation. The added value can materialize quickly and dramatically—especially during times of a rapidly rising or falling market, when you may be tempted to abandon your well-thought-out investment plan—or it may be added slowly.”

Vanguard has $483 billion in assets, an increase of 13.2% from year-end 2014. As of Dec. 31, 2015, Vanguard managed more than $3.4 trillion in global assets. The firm provides more than 300 funds to its more than 20 million investors worldwide.

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Stephen Winks

Stephen Winks

January 27, 2016 — 9:42 PM

Vanguard’s Personal Advisor Services is an advisory model which will be greatly emulated by the brokerage industry. It is not encumbered by high OSJ and product management cost of b/ds which adds little value but can document 300 bps in value added above indices—something Wall Street is not about to do. There is weakness in prudent process, yet for the mass market VPAS is difficult to beat..

Stephen Winks

Grant Barger

Grant Barger

January 26, 2016 — 7:01 PM

Brooke, I just wanted to add a little extra definition of terms that your readers may find empowering.

True Advisor Alpha has less to do with market returns and more to do with the authentic value an advisor can offer his or her clients. And that authentic value becomes relevant once it has been customized and designed for delivery as Tangible Alpha® Advisors who misconstrue the elements of the business over which they have the least amount of control, Portfolio Alpha, with the critical components of the business over which they have the most control, Advisor Alpha, will be adding undue risk and inviting commoditization of their services by allowing the perception of their authentic value to be defined simply by market returns. Bottom line, don’t confuse Advisor’s Alpha with Advisor Alpha if you truly want to differentiate yourself from your peers. (Reference: AdvisorAlpha.com)

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