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Bates Research  |  12-12-14

Vanguard to Advise Smaller Investors

This Monday, Vanguard announced that it would be ramping up its efforts in financial advising in 2015. The mutual fund company best known for pioneering low-cost funds for smaller investors is now attempting to take that model with them into the realm of actually providing financial advice.

Vanguard Personal Advisor Services (VPAS) has existed for this entire year as a pilot program for the company's move into this market space. During that time period, assets under management at VPAS have risen from $755 million to $4.2 billion. Vanguard has had a banner year in its mutual fund business as well, attracting $185 billion (a record) in inflows to its funds, and bringing the total invested in Vanguard funds to over $3 trillion.

Vanguard is now advertising its new services. The new service will require a $100,000 minimum investment (expected to decrease to $50,000 in the new year) and will cost 0.3% of AUM. This is a substantial discount over the current platform, which requires a minimum of $500,000 and charges 0.7% of AUM. For investors, this program will provide an investment plan, an asset allocation strategy, and then will monitor and rebalance the investor's portfolio going forward. While many of these tasks could be handled by algorithms, Vanguard is also offering the chance to connect with a human advisor as well -- it has hired many Certified Financial Planners and will provide the ability to connect via videoconference for those who do not live near an advisor.

The move to provide physical advisors as an option comes as the rest of the low-cost market is moving toward so-called "robo-advisors." Noted discount broker Charles Schwab is bringing their own robo-advisory services to market, using their Intelligent Portfolios unit to provide clients with an investment plan and allocation that is then managed and rebalanced by algorithms. Schwab's service will be provided for free, with different levels of service based on account size.

Schwab's move into this space was prompted by the rise of other robo-advisors like Wealthfront, which have picked up smaller accounts by offering fully automated services for a fee of 0.25% on a $100,000 investment. The supply of small investors needing financial planning services has been growing with the changing demographic trends within the United States. At the exact same time, many brokerages (like UBS and Merrill for example) have been encouraging their brokers to shed small accounts to focus on the larger ones.

Robo-advisers, Schwab and Vanguard all see an opportunity to serve these accounts, and they are willing to accept small margins in order to scoop them up. The 0.05% difference in fees between Wealthfront and Vanguard would come to $50 a year on a $100,000 account, that's a pretty small amount of money for the option to talk to a human advisor as well.

Some traditional brokers and other market participants have taken issue with the potential conflict of interest created by these programs recommending investment in Vanguard (or Schwab) funds. Vanguard has acknowledged that it "typically recommends" Vanguard mutual funds and ETFs to its clients, which may not be a bad idea given that their funds were some of the best performers. Still, potential conflicts between the financial advisory and fund arms should be taken seriously by those considering these new services and programs.