Vanguard may expand fast-growing virtual investing service to advisers

Pilot raised more than $9 billion last year along with hopes for more direct-to-consumer fund sales

Feb 25, 2015 @ 3:31 pm

By Trevor Hunnicutt

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As Vanguard Group Inc.'s virtual investing platform grows exponentially, the firm is considering offering a version of it to financial advisers, an executive at the firm told InvestmentNews.

Assets in Vanguard's Personal Advisor Services increased thirteen-fold last year, even though it is still just a pilot program that has not officially been rolled out and offered to the general public. Assets in the unit reached $10.1 billion at the end of 2014, up from $755 million in 2013, according to the firm. Vanguard expects to release the virtual service to the general public later this year.

Martha G. King, who oversees Vanguard Group Inc.'s adviser-sales division, said the firm is considering offering some form of the service to advisers, although no decisions have been made on what such an offer would look like.

“In the first two years of this, we've been very thoughtfully discussing it with our existing clients and doing so carefully because we didn't know what kind of reaction we would get,” she said. “There may be an intersection of this capability we've designed, the technology platform we've built, as something we could offer to the financial advisers that my team calls on. More to come on that.”

The phenomenal growth of a program illustrates the strength of Vanguard's relationships with retail investors who don't use financial advisers, and sends a strong signal about the potential growth for technology that continues to gain backing from venture capitalists.

It's a market that's also soon to include the Charles Schwab Corp. Schwab's program, called Intelligent Portfolios, hasn't been released yet but a spokesman for the company, Michael Cianfrocca, said the program would include a variety of funds, some managed by Schwab, as well as others from outside firms. Schwab expects to roll out a free service directly to consumers by the end of the month, and later offer a white-label version to advisers that custody with it.

Vanguard Personal Advisor Services, which combines virtual elements and human financial advisers for a fee topping out at 0.3%, has about $5 billion from other programs the company already manages. The rest of the money is new assets, according to Vanguard spokesman David Hoffman. The program is currently available to a small number of the firm's retail clients, including investors that use an existing Vanguard platform for wealthy savers.

Some advisers said Vanguard's use of its own products could diminish its usefulness to independent financial advisers.

“You do not get an independent, unbiased opinion when you go to the Dodge dealership,” said Daniel P. Wiener, chief executive officer at Adviser Investments in Newton, Mass. “They're not going to tell you about the Japanese cars that might have better service records and better performance.”

In a statement, Mr. Hoffman said Vanguard's advice is “centered” on its funds “because we believe we offer best-in-class investment products.” Vanguard will sometimes recommend keeping investments from outside the firm in some cases, for instance, when an investor has a large capital gain in an existing investment, he said.

Vanguard has consistently maintained that it has a broad enough suite of products to serve many investors' needs.

Despite its break-neck growth, the offering is still small for Vanguard. Overall, the firm has $3 trillion in U.S. fund assets and 20 million clients, with about a third of those assets coming from financial advisers.

By contrast, Wealthfront Inc., a start-up with a mostly online offering, manages $1.8 billion.

“We have this interesting dynamic where everyone's covering these sexy tech startups,” said Dieter T. Scherer Jr., a financial adviser at Adaptive Wealth Solutions in Chester, Md. “Firms that are already large like Vanguard can raise so much more capital so much more quickly.”

Mr. Scherer said Vanguard's deeper entry into enabling advisers with technology was a positive development, though it wouldn't fit his practice because he prefers a more active style of investment management than is Vanguard's hallmark.

Vanguard executives said the firm sees its direct-to-consumer businesses and adviser-sold business serving different clients, and said the intention was not to open branch offices for its in-house advisers.

Tom Orecchio, principal at Modera Wealth Management in Westwood, N.J., said many clients need more than a diversified investment portfolio and an occasional phone call.

“Financial planning is a very detailed, complex process, and very difficult to do solely by phone,” said Mr. Orecchio. “I'm not sure you can deliver comprehensive financial planning in a very systematic manner.”

“We believe investors have varying preferences when working with a financial adviser — some prefer face-to-face interactions and, for those clients, we recommend that clients consult an external local financial adviser,” said Mr. Hoffman. “For those investors who do not meet the asset threshold set by traditional financial advisors and who are comfortable with a virtual experience, our advice service offerings may be an option.”

Lee Kowarski, a vice president at kasina, a consultant to money managers, said the threat to advisers tends to be exaggerated.

“There have been reports out there every several years of something that's going to kill the adviser and the reality is the online brokerage in the '90s, with the growth of E-Trade and Schwab did not kill the adviser,” said Mr. Kowarski. “The vast majority of people don't have the time, the acumen or the comfort level to do that themselves.”

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