Vanguard officially launched its long-awaited advice service for the masses. They are calling it Vanguard Personal Advisor Services. When you go to Vanguard’s homepage for personal investors, you are greeted with this front and center:
It highlights the role of a human advisor, which is the biggest difference between Vanguard’s advice service and some of the other fully-automated investment services. Vanguard’s advice service is driven by a human advisor at every step of the way.
This is reflected in the call-to-action. The next step isn’t to answer a multiple-choice online questionnaire, get a pie chart instantly, and open your account in 15 minutes. Vanguard wants you to pick up the phone and talk to someone.
You need $50k minimum, which is higher than the other fully automated services. The fee is 0.30% of assets, on top of the low expense ratios of the Vanguard funds used.
Overall, I think it’s a great product. Many people will feel more comfortable if they talk to someone before they jump in. On the other hand, having to call someone before you can start may seem old-fashioned in this day and age.
Between $50k and $100k, relative to Wealthfront and Betterment charging 0.25%, the extra 0.05% fee from Vanguard for advice from a human advisor all year long is practically a steal. We are talking about extra $25-50 a year.
At $100k and above, Betterment‘s 0.15% fee is half of Vanguard’s fee. You then decide whether it’s worth the extra cost to get advice from a human advisor, and also whether you want Betterment’s tilt to value in its portfolio allocation.
It’s not just about knowing what to do. It’s also about actually getting it done consistently. I have yard service people mow my lawn and blow off dead leaves every week. Over the course of a year I pay them more than $1,000. They are not using any advanced techniques I don’t know of. Ever since I hired them, the yard is done much more consistently than when I was doing it myself.
Having your account managed would fall under a similar principle. If you have it down pat, you don’t need the service. If you find yourself second-guessing a lot, paying a small fee will get it done consistently and take it off your mind.
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So when does Vanguard plan to lower the fee it charges for accounts with more than $500,000? If it is a “steal” to have a .3% fee for $50K, then Vanguard is stealing by charging the same percentage, across the board.
Harry Sit says
Obviously they are pricing it low at the low end to compete with the robo-advisors. The human advisor component is simply given away for a $50k client in the hopes to establish a relationship that will eventually pay. At $500k, you are not getting the loss leader but I wouldn’t call it stealing from you. Nowhere else I know offers a human advisor plus asset management less than 0.3% on $500k.
Hugh Fullerton says
I don’t have all the details, but I have seen it mentioned that clients with more assets in the program get some additional services, such as a “dedicated” rep specifically assigned to your account. Otherwise, you might get any adviser available when you call (which probably would not be bad). One might suppose that Vanguard does not expect to make any money from this program, as long as it brings in new money for their funds. If the service is strictly advisory (not really managing your portfolio as such), I suppose one could include products outside the Vanguard line. Vanguard has a perfectly adequate brokerage, and many funds are accessible through it. I personally have a Primecap fund in a Vanguard brokerage account (because all three Vanguard accounts managed by Primecap are closed to new customers).
Harry Sit says
Hugh – At $500k and above you get an assigned advisor, but of course that same advisor is also assigned to many other clients and he or she was assigned to you randomly to begin with. Maybe the advisors working on larger accounts are more experienced.
If someone isn’t looking for having the account managed (my yard service analogy), at $500k you can already get your questions answered by an advisor for free. You can get into Vanguard’s Primecap funds once you have $1 million.
Hugh Fullerton says
As a current Vanguard client, I have been following the development of this service and reading comments on it. I plan to look into it, not because I need it now, but because I expect to be less interested or even capable of managing my retirement portfolio eventually. In addition, it should simplify the transition to my heirs. I do have a few reservations, to wit: 1) Sometimes, Vanguard customer service is not up to par. The wait to talk to someone can be excessive, but worse, their bureaucracy is not very efficient. I think the company has grown so fast that problems have developed. Probably fixable, but sometimes inconvenient when you want something done quickly. I also read that this service will only advise you to invest in Vanguard products. A lot of Vanguard products are excellent, and most carry very low costs. About 40% of my retirement portfolio is in Vanguard funds and ETFs. But in some areas, I prefer funds or ETFs from other companies.
Harry Sit says
Hugh – Every service has its own list of products they use. Betterment, Wealthfront, and Schwab Intelligent Portfolios all publish their building blocks. If you want to work around your existing assets you would have to go to a more custom shop and pay more. Vanguard and Schwab have call centers. I don’t know how much customer service you get from Betterment or Wealthfront.
Mark Zoril says
This could be a very good service. Hugh above makes some good points. What will be critical for Vanguard to do is provide good customer service to their clients and in my experience over the years, it has been a bit bumpy. If they can use a good CRM system and track their clients’ history of contact, ideas they have discussed and covered, client goals, etc… then it could be valuable. If they stumble on this, it will not work as well for them.
Robert Shaye says
(Full Disclosure: I’m an employee at FutureAdvisor)
Another company that’s worth mentioning here is FutureAdvisor. We bridge the discount, low-fee robos and full service advisors, and charge 0.5% for accounts under $500k. One of the key differences is we have a very capable team of licensed financial advisors that clients can call in anytime to ask questions and handle things like higher level tax and estate planning. We’re taking the hybrid approach as it sounds like Vanguard is. We also manage college savings accounts completely for free (no management fee at all, just underlying expense ratios).
Also, since we take assets in kind at Fidelity and TD Ameritrade, there’s no need to liquidate your holdings and incur large cap gains. We can even build diversified portfolios around your locked holdings so we can factor in what role those positions are playing in your portfolio.
Another important difference is that we are fund-agnostic, meaning sometimes we use Schwab, Vanguard, or iShares ETFs. It all depends on what is best for you, given your account size, the bid/ask spread, commission, and expense ratios. Many folks incorrectly judge funds on expense ratio alone, when there are other considerations such as bid/ask and how much you are buying. While Wealthfront puts everyone in Vanguard ETFs, our algorithm takes it a step further and finds the best ETF for your purchase. Often that is Vanguard, but if you are buying say $75,000 worth, there are several instances where it’s better to pay a $7.95 commission to get a Schwab ETF with more liquidity (lower bid/ask). In summary, our algorithm considers more variables and always picks what is best for the client.
I like Harry’s analogy to the lawn service. I wholeheartedly agree that it’s worth the fee if the service is actually going to get done. So many people leave idle cash in their portfolio or don’t do regular rebalancing, and they leave more money on the table than the cost of a robo-advisor. For disciplined investors who enjoy doing everything themselves, FutureAdvisor gives free recommendations on how to construct your portfolio. We have many clients that use our free service to balance out their portfolios, and we even email them when it’s time to rebalance!
It’s very exciting to see all the developments and competition in this space. Even better, more investors are exiting their high-fee active mutual funds and enjoying more efficient investing!
Harry Sit says
To be clear for all readers, Vanguard Personal Advisor Services, the subject of this article, uses Vanguard open-end funds, which have zero bid/ask spread at all times.
Just curious, which Schwab ETF has more liquidity (lower bid/ask) than a comparable Vanguard ETF?
Robert Shaye says
Harry, according to the Vanguard PAS Brochure from Feb, looks like they will use a combination of funds and ETFs. (see page 6 here: https://personal.vanguard.com/pdf/vpabroc.pdf) Do you have a specific reason to believe they will favor funds?
Most folks (including FutureAdvisor) prefer ETFs to a comparable fund because of their tax-efficiency and quick settlement. In addition, the ETFs at Vanguard take on the expense ratio of the same Admiral share fund, meaning someone investing less than <$10k would typically be better off getting the ETF over the same index fund. That's because the ETF gives you the Admiral share expense ratio while a position under $10k will give you the Investor share expense ratio. I'd be surprised if Vanguard exclusively used funds and not ETFs, when most of the industry prefers ETFs (mainly for tax efficiencies).
There are several examples of Schwab's ETFs besting a comparable Vanguard ETF. For example, for Broad/Total US Market exposure, SCHB beats VTI, by both bid/ask and expense ratio (0.04 vs 0.05).
A few other things I noticed while looking at the PAS brochure:
-only quarterly reviews for rebalancing
-no mention of tax-loss-harvesting. Do we know if this will be done for taxable accounts?
Don't get me wrong, we're big fans of Vanguard at FutureAdvisor, and I'm sure PAS will do quite well. Just wanted to make sure folks were aware of our offering as well, given that the automatic investment advice is completely free and if you hire us, you can always speak to a live, licensed, advisor. Our minimum is only $10k as well, compared to $50k at PAS, which is great for those just starting out.
Harry Sit says
From field reports posted by prospective customers such as this, I see Vanguard PAS is exclusively using open-end funds. I imagine if the customer already has Vanguard ETFs or if the customer states a preference for ETFs, they may do it with ETFs, but the default choice will be open-end funds. That’s why ETFs must be included in the brochure.
I understand third parties prefer ETFs because they are not able to trade Vanguard open-end funds cost effectively. In a way, Vanguard reserved its open-end funds for its own advantage. I don’t blame them.
By the way there is zero tax-efficiency advantage in Vanguard ETFs over Vanguard open-end funds because they are different share classes of the same fund.
I will have to check the bid/ask spread on SCHB and VTI when the market is open. Because VTI’s per share price is twice as high as SCHB’s, and its trading volume is 5x as high in number of shares (total dollar volume 10x as SCHB) , I will be very surprised if SCHB has a lower bid/ask spread as a percentage of the share price than VTI.
Robert Shaye says
Do we know if Vanguard’s PAS offers Tax Loss Harvesting included in the 0.3%? I don’t see it mentioned anywhere in the brochure.
And to correct my comment above, it’s actually not that Schwab has better liquidity than Vanguard (lower bid/ask spread), it’s that sometimes Schwab’s ETFs have a lower expense ratio. Take, for example, both firms product for broad market bond exposure. BND at Vanguard has an ER of 0.07% while SCHZ at Schwab has an ER of 0.05%. Schwab has a greater bid/ask spread to cross and probably a $2 commission to purchase at Vanguard if you have above $500k, but sometimes that will be justified by the lower expense ratio. That’s one of the things the FutureAdvisor algorithm does: evaluates all the ETF options and picks the best one considering expense ratio, bid/ask, and size of purchase.
Harry Sit says
I don’t know whether Vanguard’s PAS offers tax loss harvesting. You can call 877-527-4942 to find out. People have most of their money in tax advantaged accounts anyway, where tax loss harvesting doesn’t apply.