Joe Duran

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Joe Duran

Why Vanguard is about to engulf the financial planning industry

Steps advisers can take to avoid getting hurt by the fund giant's rise in the planning space

Feb 12, 2016 @ 1:47 pm

By Joe Duran

+ Zoom

Vanguard Group's ever-expanding web is now about to engulf the financial planning industry.

Bill McNabb, CEO of Vanguard Group, gave a keynote speech at the 2016 Inside ETFs conference in Florida declaring the importance of advisers in delivering alpha to clients. But a bit more interesting to me was the incredible growth the firm is experiencing in its centralized advice offering.

Vanguard is seeing inflows of $1.6 billion per month while charging only 30 basis points. Every few months they are onboarding more in assets than the entire robo-adviser world has amassed in many years of cumulative work. They have surpassed $30 billion in planning assets and they launched just last year!

The largest fund manager (and second-largest in exchange-traded funds) has its sights set squarely on the advice industry. They are well on their way to building the largest RIA delivering financial planning in the U.S. It is an important development for all of us.

The core of their success

Visit the landing page at the Vanguard Personal Advisor Services (PAS) site and you will be greeted by lots of white space, an old school rotary phone, an iPad with a picture of a lovely smiling couple and the following text:

“Nearly 40 years ago, we changed the investment world by introducing low-cost investing and helped investors keep more of their money. Now we've reinvented financial advice to help you earn more and pay less by combining the personal attention of an adviser with powerful technology.”

They have been on a mission for decades to reduce costs and deliver a solid experience to their clients. Like most disruptors, they begin with small, unloved clients and then expand their web to larger and more desirable ones.

The ever-creeping reach to larger clients

While Mr. McNabb said the typical client has $50,000 managed by Vanguard, he didn't mention what portion that represents of the client's total assets. More interesting is the obvious discrepancy on the third page of their site: an interactive illustration of how much a $250,000 investor saves versus paying their adviser the industry average of 0.99%. In case you're curious, it's right there on the page for you. This investor would save $1,725 in year one and $93,011 over 20 years. Their target market is clearly the mass affluent, and it will go up the wealth chain over time. This playbook has been massively successful on the investments side of their business, and it will be successful with planning, too.

(Related read: 4 ways to win with your clients this year)

How advisers compete: The broad and deep strategy

Do not ignore this trend. Of the $30 billion they have already attracted, Vanguard likely has several clients testing the service with only a small portion of their money. Many of these folks have advisers, and some of them might even be your clients. Ignoring the changing landscape is one surefire way to fail. So here are three steps to take over the next year if you want to win:

1. Build a moat around your client service. Too many advisers are simply providing a managed ETF or mutual fund portfolio for 1%. The more sophisticated advisers are offering a Moneyguide or Financeware plan included in that 1%. But is a face-to-face meeting alone worth the extra 70 basis points? For many of our time-crunched clients, the answer is probably no. I believe in the deeper and broader strategy of delivering a deeper level of planning experience (cover all aspects of the clients life, not just their retirement), and a broader mix of investment alternatives (blending tactical and passive strategies, or including tax management, for example). Vanguard is still a closed architecture alternative with planning-light delivery, but that will change over time or another national player will emerge. In the meantime, strengthen what you do for clients.

2. Clarify your message. Illustrating why you are worth the price difference is vital. Ensuring it's understandable and shareable by your clients is the key to growth and an absolute necessity when you are challenged by a great brand. Many advisers act like lawyers, speaking in vague, professional tones. But the world is evolving to one of clarity, transparency and participation. Sharpen your message and use technology as an ally to collaborate with clients and bring them into the process to give them understanding.

3. Segment your offerings. One effective strategy is to offer a “light” version of what you do for a lower price. It illustrates that you are aware of market pricing and your clients can choose to upgrade to a broader, deeper and more impactful relationship with you. Give clients the choice, most will want the complete experience.

The word “vanguard” is defined by “a group of people leading the way in ideas and new developments.” How can you not respect the way they have lived up to their name? Vanguard changed the fund industry as active mutual funds ignored the emergent threat. They changed the landscape again when they finally launched ETFs. While the industry focuses on robo-advisers, most are ignoring one of the biggest brands in the industry as it becomes a growing force in financial planning. Vanguard will help clients lower costs, and it will demolish the overpriced alternatives in financial planning too. Don't be caught in their web.

Joe Duran is chief executive of United Capital. Follow him @DuranMoney.

(More from Joe Duran: Watch him explain bionic advisers over a game of ping pong)

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