Vanguard, the mighty US firm famed for its index-tracking funds, has launched a financial advice service. Whilst not without its limitations, it is sure to set the cat amongst the pigeons.
We’ve felt a bit like a lone crusader spearheading the case for low (in fact fair) fees for many years now, so it is comforting to see a genuine heavyweight enter the arena.
Based on FCA published figures and sensible assumptions, the average annual cost for advice, funds and platform is well over 2% a year. Vanguard is coming in at 0.79%. For reference, most of our clients pay somewhere between 0.80% - 1.10% a year all-in (unlike Vanguard, our portfolios also include actively managed funds).
We think this is great news. Not only does Vanguard’s new service give consumers more choice, but it’s an excellent validation for both low-cost and remote financial advice - something we’ve been successfully doing for over seven years now.
Will Vanguard become a key player in the financial advice market? Almost certainly, with their reputation and brand it is hard to see them failing. At the moment, the offering is most likely to appeal to those with more straightforward needs. Complacent financial advisers should be worried, but robo-advisers like Nutmeg and diy investment platforms arguably even more so.
So how does Vanguard’s service work?
To start with you’ll need to have at least £50,000 already in a Vanguard account. If you transfer in ISAs or pensions to achieve this, it’ll have to be off your own back, Vanguard does not advise on that.
Once in place you can request the financial planning service. After completing an online fact find you will be presented with a computer-generated financial plan, mapping out your likely retirement prospects. This will also include a recommended portfolio, chosen from 13 Vanguard index-tracking funds, which is periodically rebalanced.
If you have over £100,000 invested you gain access to an advice team via phone or video, progressing to a dedicated adviser (available face to face in London) if over £750,000. Advice on combined spouse finances and pension income drawdown in retirement is not yet available, but apparently on the cards.
Whilst Vanguard will not advise on transfers of existing accounts to open a vanguard account initially, it will provide advice on subsequent potential transfers once using the service based on information supplied by the client.
What’s our view?
We like index trackers but are not convinced by the merits of them being the sole investments in a large portfolio. Most indices are weighted, meaning they are naturally biased towards certain companies and sectors. For example, the US stock market is currently tech heavy. Whilst favourable when those sectors are performing well, performance can suffer when they don’t. We prefer to balance risk by also holding active managers who invest quite differently to the index.
It remains to be seen how comprehensive the analysis for transfer advice will be, especially since it appears to rely on information provided by the client. Whilst unlikely an issue for a simple shares ISA held elsewhere, it may be less appropriate for legacy pensions held with insurers where there are often pitfalls to catch out the unaware.
My big question is how well Vanguard will get to know its clients? On the surface this feels more like more advice by computer with some human interaction thrown in. Whilst that may suffice for simpler scenarios, it could otherwise fall short.
Vanguard’s move will probably take market share off robo-advisers, most of whom are already losing a bucketful of money, and also diy investment platforms where some customers may want simple low-cost advice.
Financial advisers, even the expensive ones, who look after their clients well probably won’t see much of a threat from Vanguard for now as the service is relatively basic. Although if Vanguard has grander plans that could well change in time.
My biggest positive here is the hope Vanguard’s move may help to buck the trend of financial advisers raising their annual fees, with 1% for advice (ignoring fund and platform costs) increasingly becoming the norm.
Financial advice is currently an imperfect market, as too few customers are aware of and understand costs. Whilst Vanguard’s new service might not (yet) be perfect, it will hopefully lead to the market becoming a little more so.