Vanguard rides robo-advice wave to $65B in assets

Personal Advisor Services, four times the size of its closest competitor, combines digital and human touch

Jun 20, 2017 @ 2:08 pm

By Jeff Benjamin

+ Zoom

While much of the financial services industry has been fretting for the past few years over how to compete in the age of digital-advice platforms, The Vanguard Group Inc. appears to have cracked the code in a steady climb to more than $65 billion under management on its two-year-old robo.

Vanguard's Personal Advisor Services, which is four times the size of the next-largest robo-platform, is a hybrid that incorporates human advisers and is starting to look like the blueprint for the way to leverage digital advice.

"The Vanguard model has been a huge success because they are well-positioned to institute the hybrid model," said Anton Honikman, chief executive of MyVest.

"Going forward, I think digital advice will be dominated by these kinds of incumbent institutions that have the infrastructure they can leverage," he said. "A great brand is required, but the success of Vanguard has put everyone on notice."

Launched in May 2015, Vanguard's current hybrid robo-platform is the next generation of its Asset Management Services platform, which had a higher minimum but was designed to leverage the same existing Vanguard infrastructure, brand and client relationships.

Of the $65 billion on the new platform, $15 billion has been transferred over from the old platform, according to Vanguard spokeswoman Emily Farrell.

The older platform, which is being phased out, had a $500,000 investment minimum and charged an asset-based fee of 70 basis points.

The robo-hybrid platform, which has a $50,000 minimum and has an asset-based fee of 30 basis points, is designed to be largely digital, but also gives investors access to human advisers.

A key factor to the potential of the platform is the minimum investment level, which paves the way for larger accounts and more-established investors.

Ms. Farrell would not disclose how many clients are on the robo-platform, but said at least half are over age 65, about 35% are between 50 and 65, and 14% of are under 50.

After Vanguard, the next three largest robo-platforms all have much lower investment minimums.

Schwab Intelligent Portfolios, a $16 billion platform, has a $5,000 minimum and offers 24-hour customer support.

Betterment, a $9 billion robo-platform, does not have an investment minimum and offers investors human advice for additional fees once the account reaches a certain asset level.

Wealthfront, with $6.5 billion, has a $500 minimum and offers no human financial advice.

United Capital chief executive Joe Duran has already projected that 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."

The human adviser part of the platform comes from more than 500 salaried Vanguard employees, who either already have or are in the process of getting their certified financial planner designations.

The level of human advice is stepped up once an account reaches the $500,000 mark, at which point investors will be assigned to a specific human adviser, as opposed to being serviced from a larger pool of Vanguard advisers.

"We had a lot of investors coming to us looking for advice," Ms. Farrell said.

In terms of the robo-hybrid platform competing directly with financial advisers who are part of Vanguard's $1.1 trillion Financial Advisor Services division, Ms. Farrell said, "We've had constructive conversations with advisers that have had concerns about us competing with them.

"We've always been a strong advocate of investment advice," she said. "The advice landscape has been changing, and a lot of that change has been driven by advisers."

Steve Burkett, an investment adviser at the $200 million firm Palisade Investments, said Vanguard's platform is a "potential threat, depending on what market they're serving.

"I think the success of Vanguard as both an investment-product provider and now as an investment advisory service speaks for itself, so it is definitely a disruptive force for both traditional advisers and perhaps even more so for the early-entry robo-advisers," he said. "But I'm not sure how much personal touch they will be giving clients on that platform."

Kirk Licata, senior adviser at the $500 million LongView Wealth Management, also believes individual advisers still have a human-touch edge over even such a fine-tuned robo-hybrid as the one Vanguard is operating.

"I don't know about the idea of calling in to someone you've never even met," he said. "People are coming to us because they want to get to know someone, and technology is great but there will always be people who want the utmost personal touch."

The advantages of interpersonal relationships notwithstanding, the early performance suggests Vanguard has found its golden goose.

"The beauty of what they're doing is that they are just tapping into their massive client base without even having to advertise," said Tim Welsh, president of consulting firm Nexus Strategy.

"If they're charging 30 basis points, they won't make much money, but at Vanguard the cost of client acquisition is zero," he said. "It's just a matter of communicating with current investors."

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