Dan Jones  

Vanguard's platform success could rely on an unlikely source

Dan Jones

Dan Jones

Having spent more than a year on the edge of a diving board, Vanguard has finally made its splash into the direct-to-consumer investment world with the launch of its online investment service. But just how far those ripples spread may depend on an unlikely source.

Hargreaves Lansdown, or at least its share price, was quick to flounder in the wake of last week’s low-cost launch, shedding more than 7 per cent at one point. But Vanguard’s intentions have been in the public domain since early 2016, and its platform is not quite as cheap as some expected (the US firm was probably a victim of its own high standards in this regard).

So it’s hard to see any rational reason for Hargreaves’ drop other than profit taking – the company trades on more than 30 times earnings, after all.

Hargreaves will be reassured by several other factors, too. Retail platform users aren’t as price-sensitive as they’re imagined to be – Charles Stanley Direct would be ruling the roost by now otherwise.

Neither does Vanguard offer anything outside its own range of funds. While the company’s influence is looming ever larger over the investment industry, it doesn’t quite have the same name recognition with consumers.

Vanguard’s very philosophy may be an additional impediment: in order to keep costs down the firm doesn’t do much at all by way of marketing. And the sizeable contingent of self-directed investors who are clued up on the investment industry tend to favour a mixture of active and passive products.

So despite shifting to the platform being a no-brainer for index investing advocates, there are reasons to think that building a presence will take time – unless intermediaries pick up the baton in the interim. Advisers are becoming increasingly cost-sensitive, and the LifeStrategy funds in particular have been a successful low-cost option for many of their clients.

The absence of an adviser-charging function is a flaw here, but when the company launches its self-invested personal pension its attractions may prove hard to resist. As the Lang Cat consultancy has already pointed out, the new offering will look tempting to those with client monies on other platforms, advised or otherwise. 

There’s little doubt the platform will ultimately prove a success, but the industry should be alive to the hurdles that Vanguard must overcome first. In this context, advisers might end up forming a larger portion of the early adopters than might be imagined.

Dan Jones is editor of Investment Adviser