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Major competitive threat for advisors? Vanguard

CHICAGO — Will Vanguard increasingly compete with advisors? I think yes, and what Vanguard’s CEO said Thursday at the Morningstar Investment Conference furthers my belief. But I happen to believe it’s a good thing.

Tim Buckley came to the conference in part to accept the inaugural Morningstar Exemplary Stewardship Award, part of the 2019 Morningstar Awards for Investing Excellence. Vanguard has done so much to benefit its investor-owners that the award was deserved. But there are still plenty of tough questions to ask.

I queried Buckley on speculation that Vanguard hopes to convert 20% of its retail investors to its Personal Advisory Services business, which generally charges an annual AUM fee of 30 basis points. Buckley acknowledged that everything the firm does is for scale — “Are we trying to disrupt ourselves? Constantly,” he told reporters. And he acknowledged that Vanguard is indeed working to sign up retail investors, but declined to specify the target.

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Buckley noted Vanguard has been in the advice business for decades, including its partnership with Financial Engines, and added that target date retirement funds incorporate low-cost advice. No surprise, he pointed out that technology has dramatically lowered the costs of advice.

I happen to embrace low-cost advice from Vanguard and other low-cost robo and hybrid advisors because low fees are good for consumers. And I think good advisors should not be worried since much good advice cannot be replicated via technological solutions.

Yet rarely do I have a client come to me without a legacy portfolio that can be sold due to high tax liabilities. Very complex tax analysis must be done taking into account specific client situations such as tax brackets, possible tax-loss carry forwards, efficiency of current investments, etc.

Some day, artificial intelligence could change that. Some day.

Few conversations with Vanguard would go on very long without a discussion of fees. So I asked Buckley about a recent change in which Vanguard lowered fees on ETFs but not its Admiral share class funds. I had always recommended the Admiral class mutual funds over the ETFs for advantages such as no bid-ask spreads or premiums and discounts, the ability to buy fractional shares, faster dividend reinvestments and the ability to do automated dollar-cost averaging. The fees were always the same — until a few weeks ago.

The move, Buckley said, reflected that ETFs cost less to run. I pushed back, reminding Buckley that ETFs have always been cheaper to run. What’s different now?

ETFs now have scale, comprising about 25% of Vanguard index funds. Buckley added it was likely fees would continue to decline on the mutual fund side. As for my clients, I likely will shift my recommendation to the Vanguard ETFs over the Admiral funds.

The Vanguard chief said he was not concerned indexing will get too large. Indexing represents less than 20% of stocks (since most stocks are not owned by funds) and less than 5% of daily trading volume, he said.

“We believe in active management, we just don’t believe in high-cost active management,” he said, noting that the firm’s active funds have bested their index benchmarks by 90 basis points a year over the past 10 years (although likely not on an after-tax basis, since active investing is less tax-efficient than passive index funds).

Buckley argued that growing assets has never been a primary goal at Vanguard. Rather, by serving clients well, growth (extraordinary growth) is the result.

As I see it, Vanguard founder Jack Bogle created a culture at the firm that lives on. I don’t agree with everything Vanguard does, but they continue to do the right things for their investor-owners.

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