Vanguard quintuples assets in robo-adviser, leapfrogging competitors

In another sign that the online advice business is gaining traction among investors and that big companies may have an edge, the Vanguard Group Inc. disclosed last week that its robo platform —still in the pilot stage — has attracted $3.4 billion in assets just this year.
Assets in Vanguard Personal Advisor Services grew to $4.2 billion at the end of the third quarter, spokeswoman Katie Henderson said. At the end of 2013, the pilot program managed $755 million.
The growth means that Vanguard has leapfrogged the asset-gathering efforts by its competitors, including a raft of startups favored by venture capitalists, some of which have partnered with broker-dealers and custodians that work with financial advisers.

SMALL PIECE OF PIE

In absolute terms, the robo-advisers are still a small fraction of the wealth management industry. Wealthfront, one of the most successful of the online services, manages about $1.7 billion. On the other hand, Morgan Stanley Wealth Management, one of the largest brokerage companies in the nation, counts $2 trillion in client assets.

But some analysts see Vanguard and its fast-growing, price-slashing competitors reinventing the way investment advice is delivered.

Bill Doyle, an analyst at Forrester Research, said widespread acceptance of exchange-traded funds as portfolio building blocks vastly improved technology and the willingness of clients to trust algorithms. The low prices of these online advice platforms have created a perfect storm in the wealth management industry, he said.

“When you start to mess with pricing, all hell breaks loose,” Mr. Doyle said. “This is an idea whose time has come.”

WHAT’S INCLUDED

Vanguard’s robo model provides investors a financial plan, asset allocation, ongoing monitoring and rebalancing, and performance forecasting for 0.3% of portfolio assets annually. The service “typically recommends” Vanguard mutual and exchange-traded funds as investments to clients, according to a company brochure.

The firm also has hired an army of advisers, many of whom are certified financial planners, to work with clients. Vanguard ranked sixth among U.S. firms by the number of employees who took the CFP exam in June, according to Daniel F. Drummond, a spokesman for the designation-granting Certified Financial Planner Board of Standards Inc.

“While we are still in pilot stage and the service is not yet available broadly, adoption of the program among existing clients who are eligible has been strong,” Ms. Henderson said.

The program is scheduled to be promoted to a wider set of customers next year, the company said.

Vanguard won’t be alone.

The Charles Schwab Corp., the nation’s largest custodian, is crafting a free digital platform from scratch that it will make available to investors with at least $5,000 in assets and to affiliated financial advisers as a white-label service.

Fidelity Institutional, the second-largest custodian to registered investment advisers, said this month it would offer advisers access to LearnVest, an online advice platform that also employs human advisers. The move came less than two months after Fidelity struck a similar deal with Betterment Institutional, another robo-adviser. TD Ameritrade provides access to third-party offerings as well. Advisers have also built their own platforms or directly partnered with online firms.

Schwab’s retail offering will include no management fee, commissions or account service fees. The company will earn revenue on the investment and banking products recommended in the accounts. Many of the online startups charge under 35 basis points annually.

Other firms are taking notice.

Andrew Sieg, managing director and head of global wealth and retirement solutions at Bank of America Merrill Lynch, earlier this year said his firm is “looking at a whole host of fascinating, intriguing fin-tech companies … and trying to make sure we’re watching what we’re doing. It’s informing our product road maps and our approaches.”

Vanguard executives have said in interviews the firm does not intend to “disintermediate advisers.”

But services like Vanguard’s could chip away at large firms that employ financial advisers, according to Grant Easterbrook, a senior research associate at Corporate Insight, a consulting firm.

“The biggest threat is to some full-service firm,” he said. “Quarterly face-to-face meetings, very expensive. Not a very good website, not as transparent as Vanguard on price.”