Will Vanguard’s new robo squeeze out smaller players?
Vanguard’s planned low-cost robo advisor could represent one of the greatest threats to the independents that spawned the automated advice movement in the first place.
Branding robo advice with the Vanguard name and offering it at an all-in-cost of 20 basis points could squeeze a fledgling industry already struggling with customer acquisition costs, industry experts say. Additionally, it furthers the industry-held concern that advice in the digital realm is a commodity.
“I am really struggling with that price point,” says Lex Sokolin, global fintech co-head
at ConsenSys. “I think of Vanguard as a high quality premium investment brand that is great value for the money. Charging 15 basis points for allocation and advice feels very low — and is a signal to the market that allocation and rebalancing is really not worth very much.”
Vanguard has already demonstrated its digital advice prowess with Vanguard Personal Advisor, a hybrid platform that quickly surged to over $100 billion in assets, still the largest digital platform AUM in the market to date. A direct-to-consumer pure robo offering with $3,000 account minimums from Vanguard, some suggest, could spell real trouble for independent robos, which have long been dogged by predictions of extinction.
Even though the Vanguard Digital Advisor is still a pilot program, it has the potential to slow growth at competing independent platforms, such as Wealthfront and Betterment, considering how much brand recognition Vanguard has among investors, says Bill Winterberg, founder of advisor tech blog FPPad.com.
“Vanguard has repeatedly said publicly it aims to lower the cost of investing for the public, as well as increase the features and value of their services,” Winterberg says.
Though robo advice still represents just a sliver of overall assets being managed, studies predict the digital advice pot will grow.
Nearly 60% of Americans expect to use a robo advisor by 2025, according to Charles Schwab research. Forty-five percent of Americans think robo advisors will have the greatest impact on financial services — more than other forms of technology including cryptocurrency, blockchain and artificial intelligence.
Thus the commoditization of the robo advisor business — like Schwab’s zero-fee Intelligent Portfolios program, for example — is slowly being replicated in the planning space, says Will Trout, a senior analyst at Celent.
“It’s noteworthy that Vanguard has decided to go all in on a digital solution, one that incorporates planning but at half the fee,” says Trout.
When asked for more details about its plans, spokesman Charles Kurtz declined to comment beyond saying, “Vanguard is in the early stages of a pilot for a new advice service.”
The Vanguard move should not come as a surprise, says Roi Tavor, CEO of Nummo, a research firm that completed a robo advisor survey of more than 300 investment portfolios this year.
“It is an opportunity to test the purely digital offering versus the current hybrid model, which is more cost intensive than the digital only model,” Tavor says.
The management fee of 15 to 20 basis points is somewhat market average, Tavor adds. “While some robos pretend to be free, which they are not, many charge between 25 to 50 basis points.”
Vanguard’s major advantage is it already has a customer base of more than $100 billion in assets with clients who are digitally savvy, Tavor says.
“This may allow them to cross-sell within that customer base and gain addition share of wallet,” Tavor says. “Consequently, their customer acquisition costs should be lower than those of other robos.”
Some observers suggest the low fees attached to the pilot offering are an incentive to get customers.
"There are plenty of other firms that have low minimums," says Joel Bruckenstein, co-founder of the wealthtech conference T3. "I suspect that many investors give the robos a small amount to try them out, and then add funds as they become more comfortable."
“Perhaps the machinery is so advanced and automated, that the economics work fine,” he says. “Since they make money on the underlying funds, there’s certainly another way to monetize.”
At least one popular independent robo reacted defiantly to the news of the Vanguard pilot.
“While we have great respect for Vanguard, it is yet another product in the space that will prioritize their own funds, rather than acting as a true fiduciary and offering the best funds on the market, regardless of who manufactures them,” says Betterment spokeswoman Danielle Shechtman. “They also aren’t exactly recognized as a company that can ship a great, modern tech experience.”
Wealthfront did not respond to a request for comment.
The upside to the Vanguard pilot is that incumbents are opening themselves to advice innovation, Sokolin says.
"It’s great that digital wealth has permeated even the largest incumbents so fundamentally, but I do wish that they availed themselves to the rest of digitization potential — which is about choice and service, not just price on traditional product.”