Personal Advisor Services, the hybrid automated advice offering from Vanguard, has mimicked the success of the firm's mutual fund offerings with its rapid growth.
By the end of 2015, it counted approximately $31 billion in total assets under management; that total stood at $7 billion in March, when it was still a pilot program. Of that total $21 billion is from new money, Vanguard says, with the remainder from its wealth management and trust and estate planning service. (Clients in that service are being moved to the hybrid platform.)
Tom Rampulla, who returned from Europe to become the new head of Vanguard Financial Advisor Services, is quick to point out that Vanguard doesn't see its digital offering as a replacement or competition for its advisors.
But it has put it in a dominant position among a pack of longstanding firms with new digital offerings — including TD Ameritrade and Schwab's Intelligent Portfolios. So what can the firm do to extend its growth into digital advice? Consider buying Wealthfront or Betterment?
Rampulla notes the Valley Forge, Pa.-based firm has never done an acquisition. "That being said," he tells Re: Invent|Wealth, "it's not out of the realm of possibility."
What are the makings of a good digital platform?
The way we look at it is we want to support advice in multiple channels. Whether you're a direct client of ours, we want to help you, or if you're one of our great advisor clients in our trillion-dollar-business, we want to help you. When you think about how something's delivered, whether it's advice or not, I often think about, 'Who do I like often dealing with?' When I purchase something — I love Amazon. It's easy. I don't want to talk to anybody; I don't have to talk to anybody.
I am certainly not a millennial — I wish I was — but that's the way they like to be served. So, if you can have an experience, we'll call it the "delighters at Vanguard," that delights your client and gets what they want to get done in an accurate, smooth, seamless way; that's good digital.
Is there room for a direct-to-consumer digital automated service company or companies in this industry?
Yes, there's a spectrum and there are different needs along the spectrum. I don't want to imply that it's a waste and that it's not going to serve anybody — I don't want to imply that at all. I think you've got a very digital to a very complex in-person wealth manager and there are needs all along that spectrum.
In fact, if you're in one of those buckets of needs over time you could change for different reasons. Whether it's your complexity that increases or decreases; so I absolutely picture there being a place for digital.
Will digital advice providers die off over time because they're not able to grow at the scale needed to compete with firms like Vanguard, Fidelity and Schwab?
That's just an industry lifecycle. You get a bunch of smaller startups at the beginning. As the market matures you get some consolidation and then you have some winners and losers that shake out. I don't see why this would be any different to the general dynamic of industry maturity.
With the way that technology is today, the small startup has a pretty good shot of being a disrupter for the long term. You have a lot of smart people in Silicon Valley thinking about different industries ripe for disruption and they're going at it.
What's the strategy when it's clear that the digital space cannot be confined and the target is the marketshare of traditional providers?
Vanguard was a virtual company before people even talked about virtual. We never had bricks and mortar. We didn't have digital back then — it was mail and telephone — so we have embraced that virtual model for a long period of time.
If you look at our web experience, if you look at our digital experience with apps and what we're doing with the digital space, we've evolved over time and we continued to do that and become a major player.
We have an interest in staying with the market, being successful in the market and we think we serve our investors very well. We also happen to have some scale that is helpful. We think that brings a fair amount of benefit to reduce cost over time. We want to be a major player and we want to continue being a major player.
Would Vanguard consider Betterment or WealthFront as an acquisition target?
In our 40-year history we haven't done a single acquisition. We've had a couple of minor investments here and there, but we've never done an acquisition. We've looked at acquisition over the years and we've tended to go with organic growth. That being said, it's not out of the realm of possibility.
Did you interpret BlackRock's acquisition of FutureAdvisor as a sign that industry peers are thinking about their existing business models? Is that something Vanguard needs to do too?
We are always looking at ourselves and challenging our business model. We rolled out the Personal Advisor Service recently and that was something we looked at for a very long time and felt it was a good thing for our clients and filled a real need in the marketplace. We looked at ETFs. We had one ETF in 2002 and we just kept challenging ourselves and now we're the second largest provider. So we do constantly challenge ourselves.
We keep an eye on the competition, but I will tell you that we're not obsessed with what's happening with our competitors. We're thinking about our clients and what we should be doing.
I'm not going to say we don't look at them; it's that it wouldn't prompt us to necessarily move. But we are thinking about these things.
Is it inevitable that a financial advisory firm will eventually, sooner than later, have to have some sort of digital overlay for combination of onboarding automated services for ETF-type products that are probably more geared for clients with lower access?
If I were an advisor, I would think about the things that cause friction in my business. It's a lot of this stuff. As an advisor my value is actually on the relationship, since I want to scale my business and not just for lower-end clients.
If I'm an advisor, I would love to have a great backend that helps me do this. The engine of our PAS system has great technology behind it, but I'm still out front adding a great deal of value there. Perhaps if I had a robo, and it were a way for me to get a client engaged, it might get them in and as they grow and move up the maturity line, maybe that's a way to start acquiring at a time when I couldn’t acquire because they were small amounts of assets.
I would be thinking of that, and boy that would make me more efficient. That should reduce my expense and it should help me compete on price a bit more because that's probably one of the things that's going to happen out of all of this; there is probably going to be pricing pressure over some period of time in this industry.
A number of these robos actually have Vanguard ETFs in their underlying baskets. What do you think about that?
What do you think is the biggest challenge for advisors right now overall?
If I were an advisor, after I got over the shock of what's happening, I would probably see this as an opportunity. I will draw a little bit of a parallel to the U.K. when I was there in 2012, when all commissions and payments were banned in the industry.
Advisors were in shock. They had to move pretty quickly and there was a lot of disruption. Some advisors fell out of it and couldn’t compete. Successful advisors thought about it and saw that time as an opportunity and came out in the end stronger. They had folks see their value proposition.
If I was an advisor, I would look at this as an opportunity to, one, make myself more efficient and, two, really define my value proposition and stand out. You can really stand out from the robo crowd as a digital advisor.
So I would actually look at it on the positive side. Once I would get over the shock I would look at it as an opportunity to distinguish myself.
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