Vanguard is in the “early stages of a pilot for a new advice service,” called Vanguard Digital Advisor, according to a company spokesperson and recent regulatory filings. On Monday, the financial services company, which already offers automated investing and access to financial planners via its Personal Advisor Services (PAS), filed a document with the SEC outlining a “digital interface and website designed to help Clients and prospective clients create a personalized, goal-based financial plan.” It’s currently available on an invitation-only basis. Here's the kicker: It's offering financial planning and investment management for just a couple tenths of a percentage point of assets under management.
On the surface, Vanguard Digital Advisor sounds like many automated investing platforms: It assesses clients’ risk characteristics; it exercises discretionary management over assets (including halting trading in cases of “an undue risk of harm”); and, perhaps most importantly, it includes goal forecasting.
In fact, Digital Advisor is built on long-term, goal-based investing. Goals are currently limited to saving for retirement but in the future will include “personalized financial goals” added by the investor, according to its regulatory filing. It will also assess the feasibility of meeting financial goals using assets or accounts that Digital Advisor does not manage—the caveat being that since it is not managing those assets, it cannot increase the likelihood of success for those goals.
The tool generates 10,000 scenarios to measure the likelihood of meeting a goal. Lifetime cash flows also factor into assessments, like retirement income needs.
While investors with small amounts of assets were priced out of Vanguard’s PAS, a broader swath of investors will have access to Digital Advisor. Investors need only $3,000 to open an account, compared with $50,000 for PAS, and advisory fees are set at 0.20% of assets, charged annually and calculated quarterly, for managed retail accounts. There is also a 401(k) option for Digital Advisor, with a $5 minimum to enroll if the service is supported by the investor’s plan sponsor.
Currently, Digital Advisor doesn’t allow for funds to be moved directly to a user’s bank account after the sale of assets, but the feature is planned for the future, according to the regulatory filing. The service also forbids “third-party discretionary advice on assets held in the Portfolio.”
The launch of Digital Advisor should be a wake-up call for advisors, said Alois Pirker, research director at Aite Group’s wealth management division. “Every time, when [new investing] options are being created that are cheaper, you see fee pressure,” he said. “Many advisors still have a wrapped fee that covers everything—the planning efforts as well as the investment management efforts. In totality, they will be looking rich on the fees.”
Just as self-service in online brokerages started commoditizing trading decades ago, and more recently portfolios started becoming commoditized with the advent of robo advisors, planning will start to look more self-service because of Vanguard Digital Advisor, said Pirker. Fees for financial planning will start to erode over the next couple of years, he predicted.
The move to launch Digital Advisor for investors with less than $50,000 in investable assets is a continuation of Vanguard’s strategy to move from strategies centered around “live advisors” to a “classic robo advice product,” said David Goldstone, research analyst at Backend Benchmarking. “In typical Vanguard fashion this product will under-cut the cost of most of the other digital advice products available today,” he noted. “This product will increase an already highly competitive market for digital-only advice products and amp up pricing pressure in an industry that already operates on thin margins.”
It’s helpful to view Vanguard as a product manufacturer and distributor, added Pirker. “They know they have attractive products. As such, it’s just a matter of building that bridge to the client.” Vanguard’s move will ramp up pressure on Fidelity, which uses its robo Fidelity Go and focuses on its custody business to gather assets, and Schwab, which uses the planning component of Schwab Intelligent Portfolios Premium to rake in assets, he said.
Vanguard is filling out its advisory ecosystem and will eventually be used to “onramp investors into the world of advisory relationships,” said Scott Smith, director of advice relationships at Cerulli. He predicted “a good segment” of Digital Advisor clients could find their way over to PAS “as they find they want more in the way of comprehensive financial planning.”
A mass-produced, planning-forward solution like Digital Advisor wouldn’t be possible without automation, said William Trout, head of wealth management at Celent. “Digital, planning-first advice is getting cheaper and cheaper,” he said. “Not because it’s not valuable, but because automation has made it easy to deliver Monte Carlo and other types of scenario visualization into the hands of investors, and at a very low price.”
With no startlingly new advancements in advisor technology lately, why has it taken years between the pilot of Vanguard Digital Advisor and the launch of PAS? A spokesperson for Vanguard declined to provide details on the timing, but Goldstone offered his analysis. As many firms that have tried to build their own solutions have discovered, it’s not easy being a tech company. “A digital[ly] focused product takes time to develop in-house,” he said. “I imagine this initiative has been in production for quite some time at Vanguard.”
As many an advisor knows, serving small-asset clients is often the most difficult task an advisor faces. Vanguard is now on its way to tackling that challenge.
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