Like many robo-advisers gaining steam, Vanguard's Personal Advisor Services platform — scheduled to launch by this summer — is built largely around portfolios that track market indexes.
But in a move that may give maligned active managers hope, the low-cost money manager is letting investors decide whether or not to complement those portfolios with funds managed by stock and bond pickers.
“Each individual client has specific needs and preferences when it comes to their portfolios, so we want to give them that choice,” said Katie Henderson, a spokeswoman for Valley Forge, Pa.-based Vanguard.
Vanguard isn't the only firm opening it's the doors to active management in digital wealth offerings. Riskalyze Inc., a software firm based in Auburn, Calif., has been partnering with money managers such as
CLS Investments and
Schreiner Capital Management Inc. on actively managed digital offerings.
Vanguard, founded in 1975 by the buy-and-hold, index-investing crusader John C. Bogle, is now the dominant force in mutual funds, with $3 trillion in assets. Last year the firm took in $4 of every $10 that flowed into mutual funds, and their cousin exchange-traded funds.
While the company is best known for index-tracking investments, Vanguard also offers active funds, some managed by dozens of outside managers, or sub-advisers, such as Wellington Management Co.
Now, the firm is poised to extend its reach in the popular category of algorithm-driven advice. While the low-cost offerings by Charles Schwab & Co. Inc.,
Betterment and
Wealthfront all use index ETFs and rely almost exclusively on digital interaction with clients, Vanguard is going in a different direction — the program
uses only Vanguard funds. And its clients will be able to work with a financial adviser by phone.
Vanguard's Personal Advisor Services already manages more than $10 billion, in a pilot-testing phase, about half of which comes from existing clients.
The only time the firm actually recommends active management is in the case of municipal bonds, a market that is often considered “inefficient,” or chronically mispriced. Beyond that, the firm discusses active strategies based on clients' interest or preference. After that, the suitability of the approach is covered, according to Ms. Henderson.
Ms. Henderson said clients would have to acknowledge they are taking on “additional risk” for the “opportunity of increased returns.”
In taxable brokerage accounts, the firm would “discourage” active management because of the tax consequences associated with higher portfolio turnover in those strategies. But if the investor prefers it, he or she could do an all-active approach in accounts with tax advantages such as individual retirement accounts.
“We discourage building an active equity portfolio in non-retirement accounts due to tax consequences,” said Ms. Henderson. “Active equity is less tax efficient than index due to increased portfolio turnover.”
According to Morningstar Inc., 30% of actively managed mutual funds outperformed than their benchmarks in 2014.
In some asset classes, particularly U.S. stocks, assets have flown from active products to benchmark-tracking products.
But those numbers can be deceiving: investment advisers who trade in and out of index funds are also employing a kind of active-management strategy, tactical asset allocation.
“We think tactical is good for a lot of reasons,” said Gregory H. Skidmore, president of Belpointe Asset Management, a wealth advisory. He's looking to start his own robo-adviser that would include exposure to tactical managers. “Tactical really focuses on reducing drawdowns,” or losses, he said.
