Vanguard digital-only tool could pinch Wealthfront, Betterment

Firm's digital advice tool isn't even out yet, but industry experts suggest today's digital advice providers start innovating

Sep 19, 2019 @ 3:00 pm

By Ryan W. Neal

Vanguard isn't talking yet about the new all-digital financial planning and automated investing product it is currently testing, but a brochure filed with regulators this week hit the already crowded and competitive digital advice marketplace like a bomb.

The firm's Personal Advisor Services already dominates the hybrid robo-advice space with about $140 billion in assets under management, though the majority were brought over from existing Vanguard accounts. The new robo-adviser, currently called Vanguard Digital Advisor, promises to bring a more affordable, purely digital alternative down market to a greater number of investors.

While PAS requires a $50,000 minimum investment and charges a 0.30% annual management fee, investors can open a Digital Advisor account with just $3,000 and pay a 0.15% management fee. Digital Advisor won't include support from a human adviser, but Vanguard's filing with the U.S. Securities and Exchange Commission indicates that the company is developing a goals-based platform to help clients create a strategy they will stick with.

[More: The best robo-advisers for different investors]

Perhaps even more interesting is Vanguard's plan to deploy the robo to employer-sponsored retirement plans, offering extremely low-cost managed accounts to plan participants with as little as $5 in their 401(k).

Even with the cost of the underlying Vanguard ETFs pumping the all-in cost up to 0.20%, Digital Advisor still presents a cheaper alternative to other purely digital advisers on the market such as Wealthfront and Betterment. Considering these robos rely heavily on Vanguard investment products in their portfolios, some think Vanguard's entry into this market could pinch the startups.

Digital Advisor brings Vanguard in even more direct competition with Charles Schwab's digital advice strategy. PAS and Schwab Intelligent Portfolios Premiums will offer digital advice with a human adviser, while Digital Advisor and Schwab Intelligent Portfolios will compete for assets in the affordable, purely digital market.

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"It's a bomb into the marketplace for sure," said Josh Book, CEO and co-founder of financial services research and consulting firm ParameterInsights. He said other robos are going to have to get more innovative and creative with the tools they create.

Just being the cheapest option on the market is not going to be enough to win consumers in the mass market space, Mr. Book said. While fees are important, they matter less to consumers than minimum account requirements and branding when making an initial investment in a robo-adviser, according to ParameterInsights' research.

"The battleground today is how these firms engage with consumers," Mr. Book said. "Consumers don't have the sophistication to understand the difference between going to Vanguard directly or going to Wealthfront. They just evaluate how they were engaged and what the experience was like."

Vanguard and Wealthfront did not respond to a request for comment, and Schwab declined to comment.

Betterment spokeswoman Danielle Shechtman said in an email that while Betterment has "great respect for Vanguard," the company views Digital Advisor as "yet another product in the space that will prioritize their own funds, rather than acting as a true fiduciary and identifying the best funds on the market, regardless of who manufactures them."

"They also aren't exactly recognized as a company that can ship a great, modern tech experience," Ms. Shechtman said.

But XY Planning Network co-founder Alan Moore is confident Vanguard will be able to develop pretty much on par with leading robos given the firm's vast resources. Even if Vanguard's technology, which has yet to be seen, falls short of Betterment's or Wealthfront's, the startups must spend much more on marketing costs to compete with nationally recognized brands.

"They are really going to struggle because in the end, the first mover advantage is done," Mr. Moore said.

Startups should be able to maintain existing market share, but future growth is about to get much more difficult, he said. "Vanguard has the same advantage Schwab has: client acquisitions cost is so low."

"If your differentiator is technology, you're screwed," Mr. Moore said. "Vanguard is really good at building stuff for super cheap and scaling the heck out of it. And they've got the brand recognition. In the grand scheme of things, they have an advantage."

Backend Benchmarking head of research David Goldstone agrees that anytime Vanguard enters a market, it will be disruptive, especially around pricing. But he disagrees that Vanguard will necessarily present an obstacle the digital startups can't manage.

Even if the quick growth Betterment and Wealthfront experienced in the beginning of the decade has slowed in recent years, the companies have proven then can still thrive as larger financial institutions launch competing products, Mr. Goldstone said.

"Betterment and Wealthfront customers made a choice to be a Betterment or a Wealthfront customer, typically because they have better digital interfaces and have really kind of innovated in that space," Mr. Goldstone said.

For example, both firms have grown beyond brokerage accounts to offer cash savings. Wealthfront says this new product helped itgrow nearly 100% in the last eight months.

"They've done a good job setting themselves up and continuing to develop and add features to make their products more sticky beyond a simple managed ETF portfolio," Mr. Goldstone said.

He sees Vanguard being even more disruptive to companies like Financial Engines by delivering Digital Advisor to its 401(k) clients. It could impact the growth of Betterment's 401(k) channel, Betterment for Business, however, it's likely the companies are going after different clients, Mr. Goldstone said.

Even if Schwab and Vanguard exchange blows going forward, the pool of investable assets may still be large enough for everyone to swim alongside each other nicely.

"The reality is there is plenty of market share for [Schwab and Vanguard] to be wildly successful," Mr. Moore said. "It's not a small market where only one can win."

[More: Will Vanguard's new robo send 401(k) advice fees to zero?]

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