In Retail, Amazon is trying to take over the world. Together with WalMart, Amazon is trying to use their scale to create a superior customer experience at a greater value point than other retailers, in seemingly all products. Small retailers are suffering. Traditional downtown retail areas and malls are suffering. Mall space is being converted from retail to other uses. Havoc is being wreaked.
Vanguard
Similarly, in the investing world, Vanguard is trying to take over the world, and doing so on the basis of being the low-cost provider. Vanguard’s growth has coincided with the explosion in interest in Index Funds, which are mutual funds or exchange-traded funds that seek to replicate an index. You can buy the Vanguard S&P 500 Index ETF for $0 commission and a 4 basis point annual expense ratio. That is cheap! Lower fees = more money you keep in your account. It is hard to beat that if you are content with the Vanguard universe of Funds and ETF’s. It has worked, and Vanguard is projecting it will work even more going forward. According to Bloomberg, Vanguard’s assets under management was over $4.7 Trillion as of Q4 2017 and projected to grow to $10 Trillion (with a T) by 2023. Wow!
Personal Advisor Services
In a standard Vanguard account, you are on your own. There are no brokers to talk to or to give you advice. Vanguard has customer service help, which can help with placing an order, but there is no investment advice in a standard Vanguard account. If you want a more hands-on approach, you can open an account in a relatively new division called Vanguard Personal Advisor Services. The fee for Personal Advisor Services is 30 basis points annually times your account balance. Vanguard’s Advisors are paid salary only, with no commission, so they are not directly incentivized to sell more. 3o basis points are cheap as compared with the typical 1% to 2% fee that many advisors charge. It is very difficult for traditional advisors, particularly independent advisors (such as my firm) to compete. Independents need to offer a better value proposition. More on that later.
Robo-Advisors
In establishing the Personal Advisor Services group, Vanguard went beyond just offering a “Robo-Advisor” option. A Robo-Advisor is a service whereby your portfolio is positioned and periodically rebalanced by a computer algorithm. There is no human interaction with a Robo-Advisor – just the client and the advisory firm’s algorithm. Robo-Advisor firms include WealthFront and Betterment. Vanguard decided its clients wanted more than just an algorithm. With its size, Vanguard could provide both an algorithm and an actual human being to speak with at about the same 30 basis point fee. That’s tough for the Betterments of the world to compete with.
Value Proposition
Independent advisors need to offer something more than what Vanguard offers for 30 basis points. One valuable aspect might be the ability to keep the same individual advisor. At Vanguard, unless you have over $500,000 in their account, your Personal Advisor will be whoever answers the phone when you call in. If you have over $500,000 at Vanguard, then you are part of the Voyager Select program, and you will be placed with a specific advisor. Another valuable part of an Independent’s business might be total financial planning, including estate, gift, education, insurance and any other financial planning needs that Vanguard may not be set up to do. In addition, an Independent might be more likely to offer outside-the-box thinking, and perhaps more able to solve more complex financial problems or achieve complex goals. Lastly, it is unlikely you will receive an honest, off-the-cuff blog such as this from a Vanguard advisor – they are more likely going to toe the corporate line.
IMO
It will be difficult going forward for independent advisors, as well as advisors from other traditional brokerages such as Merrill Lynch, to compete with Vanguard. We have to be smart about how we market ourselves and clearly state how what we offer is valuable enough that a client will choose us over Vanguard.