Vanguard Group has grown to $3.4 trillion in assets by dominating sales of low-cost index mutual funds, the ultimate do-it-yourself investments. Now it's seized an early lead in a new business: inexpensive financial advice.
Automated, Web-based “robo advisers” such as the startups Betterment and Wealthfront have attracted a lot of attention in the investment industry. But Vanguard's new Personal Advisor Services platform, which combines tech with human advisers reached by phone or video chat, is drawing more money. From its official launch last May through December, it brought in $12 billion in assets. That's four times the amount held by either Betterment or Wealthfront and more than twice as much as the automated-advice platform Charles Schwab introduced in early 2015.
Vanguard's massive scale is one advantage: More than 90% of clients had another connection to the company, such as a retirement account. The addition of real people may be helping as well. “There is something about money that is different from booking a hotel,” says Nancy Koehn, a Harvard Business School professor. “People have anxiety about money. I think the human element matters even if you don't use it.”
Robo-adviser apps and websites guide investors through a series of questions about their age, salary, financial goals, and risk tolerance. They then usually invest in one of several model portfolios, which are made up of a mix of low-cost exchange-traded index funds. The programs automatically buy and sell fund shares to keep assets in balance, while gradually adjusting the mix to lower risk as the investor ages. While a human investment adviser may charge 1% of assets per year, robos may charge 0.25% or less. The Schwab Intelligent Portfolios service is free — it earns revenue in part by investing clients' money in Schwab-managed ETFs.
Vanguard is a little more expensive, at 0.30% per year. After answering questions online, new customers must speak to an adviser employed by Vanguard before the plan is set in motion. (About 40% of customers connect by video chat at some point.) The conversation gives the adviser a chance to ask about other savings or assets people have and to gauge their investment preferences, says Karin Risi, managing director and head of the retail investor division at the company.
Many of the Vanguard advisers have a credential as a financial planner or are working toward one. Customers need at least $50,000 invested at Vanguard to participate, but only those with at least $500,000 to invest get a dedicated adviser. Clients with less money could end up speaking to one of several members of a team when they call in.
The market for digitally based advice is expected to grow to $285 billion by 2017, according to researcher Aite Group. Millions of baby boomers are nearing retirement and need help figuring out how to make the money last. At the same time, widespread acceptance of index funds has helped make automated portfolios possible. Investors don't necessarily look to advisers to help them pick individual stocks and bonds.
“We aspire to serve hundreds of thousands of clients over time,” Ms. Risi says. In addition to the $12 billion from new advisory clients since May, Vanguard has brought in $9 billion from customers who were part of an earlier pilot program. The company did not reveal the number of accounts.
At Schwab, three-quarters of those who've joined its automated service were existing customers. The company oversees $2.5 trillion in total client assets, and by December it had attracted $5.3 billion to Intelligent Portfolios, with 63,000 accounts. Clients can reach out to the company by phone or online, but it's not required, like it is at Vanguard.
“The startups are facing an uphill battle,” says Scott Smith, a director at Cerulli Associates in Boston. “They are going up against firms with trillions of dollars of assets.”
Executives at both Betterment and Wealthfront say there's room for established companies and pioneers. Adam Nash, chief executive officer of $3 billion Wealthfront, which launched in 2011, says his company focuses on younger investors with different ideas about technology and investing while incumbents are battling for boomers' assets. “Those older investors aren't looking for the same things,” he says. “We want to be the Amazon, the Netflix in this category.” Nash says 90% of Wealthfront customers are younger than 50, and 60 percent are under 35.
About two-thirds of the Vanguard service's clients are nearing retirement age or retired. Roughly half of those who signed up for Schwab's robo are over 50, says Tobin McDaniel, president of Schwab Wealth Investment Advisory. Of course, older savers are also where most of the money is.
Burton Malkiel knows both sides of this new industry. The Princeton economist's book A Random Walk Down Wall Street championed the idea of index investing, and he spent decades on the Vanguard board. He's also chief investment officer for Wealthfront. Mr. Malkiel says the robo-adviser trend is about the “Vanguardization of investment advice.”
As happened with index funds, cut-rate competition will push fees down for all kinds of advice, and more people will be able to get help building portfolios. “The presence of Vanguard and Schwab — consumer-friendly companies — is a good thing, not a bad thing,” Mr. Malkiel says.