Robo-advisers have been around for over a decade, and throughout that time we've been hearing that they are a threat to established independent wealth advisers. While they might have attracted a lot of industry coverage, most robos have gathered a relatively small amount of market share over 10 years. Yet in two short years, Vanguard has quietly amassed over $65 billion in assets under management in its Personal Advisor Services offering and has built one of the largest wealth management firms in the nation. Robos as first constituted were never going to be a legitimate threat to replace the independent wealth manager, especially with wealthier clients. What Vanguard is building is a different threat altogether.
There are two base requirements for a millionaire next door to entrust their money to a wealth manager: the first is that they trust the firm to deliver quality advice, the second is that the adviser can help solve financial dilemmas (or take the blame if there is a failure) in a personal and comprehensive way. Up until recently the independent advisory firms could check both boxes better than anyone else. But that's changing.
THE FIRST TRILLION-DOLLAR WEALTH MANAGER
Vanguard Personal Advisor Services will likely be the first trillion-dollar AUM wealth management firm providing personal, human-led planning and investments in a consistent, digitally-powered and mobile-friendly way. And they are delivering a dedicated planner and a managed portfolio for a fee of 0.3%. It's hard to overestimate the impact that Vanguard is going to have across the entire wealth management industry, both directly and indirectly. Most importantly, they are the first major brand that can address the two base requirements wealthy clients have well enough to be a serious threat.
So here are the likely changes coming into our industry now that Vanguard is successfully going beyond investing and into planning and advice:
1. The mega consumer brands. Vanguard's success is rattling every large retailer. Firms like Schwab, Fidelity, BlackRock and every mutual fund and ETF firm have felt the impact of the Vanguard model in low cost indexing. You can bet they are proactively discussing how to protect their firms from Vanguard taking on wealth management next. Many of these large consumer brands will create their own direct to consumer model, like Schwab adding a personal adviser to their Intelligent Portfolios (for 0.28 basis points). They will use their size to develop new systems and drive pricing down.
2. The reconstituted robos. In the last 18 months, Financial Engines acquired The Mutual Fund Store; Betterment decided to add human advisers to their offering; and Personal Capital raised money to expand their hybrid human/tech offering. They don't have the established brands yet, but they have the money and a business model that compresses pricing for all consumers. Many will flat line and flounder in this increasingly competitive landscape and struggle with the human element, but some might end up as a viable alternative to Vanguard and the independent wealth manager.
3. Turnkey asset management programs (TAMPs). From the large players like Envestnet and AssetMark to the specialized TAMPs like Loring Ward, there's a pressing need to evolve. What happens to their businesses when faced with increased pricing pressure from consumers? Some TAMPs won't make it, but those that do will have to invest heavily in technology to keep deepening their value, and will also need to offer scaled down services at lower costs. Some might even decide to go direct to consumer.
4. The national independent RIAs. Firms like Edelman, Creative Planning and my own, United Capital, are investing heavily in technology to help their advisers become bionic, improve client engagement, increase scale and drive down costs. It's a race to improve the advice provided and how we deliver it while deepening our relationships with clients.
5. The independent adviser. The smart ones are scrambling to modernize their business models, going beyond investing and applying technology to scale their practice. The rest will wait too long and then try to compete by dropping prices.
This is all great for consumers, but we all saw what happened when Vanguard made indexing and the cost of underlying investment products a front-of-mind issue. They changed our entire world regarding how we invest for clients and what we can charge. The success they are having in personal planning is going to have a deeper and far more direct impact on wealth managers and everyone that serves them.
The only thing holding Vanguard back right now is that they can't hire financial planners fast enough to service all the clients coming their way. And where are all those clients coming from? Some of them were going to be your future clients. Some of them could be your existing ones.
Joe Duran is chief executive of United Capital. Follow him @DuranMoney.