Vanguard’s robo recommendations? Vanguard funds only

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Vanguard’s latest planned robo advisor will feature bare-bones pricing and a low bar for entry — but it also will demand investment exclusivity of its clients.

The indexing giant’s pilot Vanguard Digital Advisor will be priced at 15 basis points and have a $3,000 account minimum, but allocate client assets almost entirely in Vanguard funds. Clients will otherwise have to request to personalize their portfolio with outside funds. The platform’s investment strategy is founded in the same “glide-path and asset allocation” that serves Vanguard’s Target Retirement single mutual fund, according to SEC filings.

The approach is also used in Vanguard’s hybrid advice platform Personal Advisor Services, where clients are paired with in-house CFPs that help set up financial plans and create investment strategies. Those CFPs are required to recommend only Vanguard products, unless directed to do otherwise by clients in extenuating circumstances.

“Personal Advisor Services leads with Vanguard index funds because we offer a best-in-class line-up,” says Vanguard spokesman Charles Kurtz, adding the firm is transparent about utilizing proprietary funds in disclosures, marketing materials and throughout the client onboarding process. “Our products are among the lowest cost and most diversified in the market, and exhibit extremely tight tracking.”

Almost all of the industry’s leading digital advice platforms rely on some mix of Vanguard exchange traded funds in the strategies they place their clients in. Some platforms that do not use Vanguard are also exclusively comprised of proprietary offerings, like Merrill Edge and JPMorgan Chase’s YouInvest.

Some industry experts argue boxing clients into fund-specific portfolios, specifically beginner investors, is a disservice and is rooted in closed-architecture asset management practices.

“Clients think the intention of the robo advisor is to provide advice,” says Roi Tavor, CEO of Nummo, a personal finance platform that completed a survey of more than 300 automated investment portfolios this year. “It’s not.”

However, Vanguard’s Kurtz says the firm doesn’t force clients to sell non-Vanguard investments.

“As a practical matter, most PAS clients are Vanguard investors who come to us with a portfolio of Vanguard active and index funds, as well as competitor funds,” he said. “PAS advisors take into account each client’s unique circumstances and personal preferences. For some clients, there may be a reason to keep outside investments, such as embedded capital gains.”

The Vanguard Digital Advisor disclosure addresses the possibility of conflicts arising from a fund provider offering digital wealth management advice under the umbrella of an RIA. Thus, Vanguard says it will reduce the gross advisory fee by the amount of revenue the firm collects on clients’ portfolios to calculate a net advisory cost.

Asset managers have long viewed robo advice as another distribution arm for products, partly because of digital’s promise as a new channel.

In total, assets managed on digital platforms are expected to soar to $1.26 trillion by 2023, according to research by Aite Group. Nearly 60% of Americans expect to use a robo advisor by 2025, according to Charles Schwab. 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.

Other asset managers, including Schwab and Fidelity, have launched direct-to-consumer digital-only robos and hybrid platfoms. But Vanguard has been the most successful among its peers in the space to date, as its hybrid has amassed more than $100 billion in assets under management and still remains the only platform to reach that plateau.

But Tavor says the blurring of advice and product provider could leave clients ill-informed about the underlying fee and compensation structures and how to invest their assets most effectively.

“It’s an epic discussion in the industry right now,” Tavor says. “Is Vanguard entering into the robo advisor industry to get into the advice game? That, I do not believe at all.”

Advisors registered as investment advisor representatives under the 1940 Act, whether digital or human, are required to protect the interests of the client as a fiduciary, and not the interests of the fund company or distributor, says Bill Winterberg, founder of advisor tech blog

Advice given to clients should consider all costs involved, including management and administrative fees, transaction costs and opportunity costs, Winterberg says, and not just the price of the fund expenses alone. “For this reason, I would guess that it would be difficult for a client to prove a breach of fiduciary duty,” Winterberg says.

The long simmering debate over whether robos can act as fiduciaries could be revisited, some suggest. But for now, at least one industry expert says Vanguard’s pilot project is just that — a pilot, subject to change.

“I don’t think Vanguard is subverting the fiduciary concept here, although it’s true that the optics aren’t ideal,” says Will Trout, senior analyst at Celent. “I’d say Vanguard deserves a little leeway for having invented the concept of low-cost investing — and continuing to push the innovation needle.”

The underlying index funds offered at Vanguard and its largest competitors are all very comparable in terms of both pricing and investment strategy, Trout adds.

“Vanguard needs to make money somehow, and their funds are among the cheapest in the business.”

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