As with most fund group direct services, you can only buy its funds and, as it stands, there is no advice or a pension wrapper. Normally this would not merit coverage in almost every national newspaper and on Sky News, but this is no normal fund manager. It is Vanguard, and it is coming to eat your breakfast, lunch and dinner.
For months the industry has been in a state of fevered anticipation, speculating about how and when Vanguard would enter the direct UK market. Its funds have, of course, been available via advised and direct platforms for several years, but unless you had more than £100,000 to invest you had to go via (and pay) a third party.
The new direct offering changes this. Investors can invest with a minimum lump sum amount of £500 and/or a minimum monthly savings contribution of £100, and will only pay an account fee of 15bps (capped at £375 annually) plus the ongoing charge figure. This is seriously cheap. Anyone investing into Vanguard funds elsewhere is likely – although not certain – to be better off if they transfer. The Vanguard fanboys and girls have probably already invested, and clearly the weighty press and financial press campaign is being deployed to increase this reach further. Meanwhile, the current industry is, perhaps nervously, looking to see what happens next.
The asset management sector is already seeing a shift into passive solutions. Last month the Investment Association reported a record month of flows, with £4bn of new retail money invested. More than 40 per cent of this – £1.7bn – went into trackers.
Total assets under administration for trackers stands at 13.7 per cent of industry assets, so the current run rate is way above the absolute level of assets. The big question for many asset management groups is, what is behind this shift? Is it cost sensitivity, or a preference for a passive (as opposed to active) investment strategy?
It is, perhaps, most likely to be a combination of both. With the final paper from the FCA’s Asset Management Study due over the coming months, low-cost passive providers such as Vanguard might have picked the perfect time to launch. A combination of its own self-generated publicity and being the right side of the regulatory pressure directed at the incumbent providers could be a powerful force to contend with.
Over in platform land (worst theme park ever) the impact of the launch was instantly visible. Shares in Hargreaves Lansdown fell by more than 8 per cent on the day of launch. How directly correlated to Vanguard’s news only those trading the shares will know, but as the market leader by some distance in the direct space it is only natural that we should look here to consider what might happen to other direct platforms.
The first thing to note is that Vanguard is not actually a platform. A moot technical point perhaps, but it does highlight that a direct comparison between it and the existing direct platform market is a not as simple as comparing price. Most existing platforms offer a wide range of funds and access to a Sipp wrapper. Vanguard currently offers neither of these.
If, or when, this changes, the comparisons with existing platforms become more valid, but for now you need to be comfortable with these constraints if you choose to become a Vanguard customer. For many, the ability to invest in a wider range of funds and wrappers will continue to be attractive.
Equally so, Hargreaves Lansdown has almost conclusively proved that the platform market is not price sensitive. It has been 10 to 20 basis points more expensive than its main rivals for a long time, yet is still the biggest platform by miles. This was demonstrated in its latest trading update, issued two days after the Vanguard launch, where it reported 56,000 new customers acquired, with net flows of £3.3bn, so far this year (£1bn above last year). If Vanguard is going to “eat its lunch” there is plenty to go around.
Much of the market commentary has been about the impact on the direct market, yet the advised market could actually be where the biggest changes occur. The combination of the 15bps product fee and the £375 price cap is a real killer and in pure price terms way below every advised platform bar fixed fee offerings. For an advised client the limitations of the current Vanguard offering (no Sipp, constrained fund range) are probably even more of an issue, but if a client is happily invested in, say, LifeStrategy and nothing else, then the cost savings could be huge.
For example, for a £1m client, the market average for advised platforms is 22bps (for Isa), therefore creating an annual platform charge of £2,200. Or put it another way, an annual saving of £1,825 if you transfer to Vanguard Direct.
For £500,000 it is a similar picture. Advised market average is 26bps, so an annual saving of £908 if you move. Vanguard might be aiming this launch at the direct investor, but the advised market can not ignore it. Platforms with large books of Vanguard business will doubtless be keeping a close eye on net and gross flows over the coming months.
Vanguard has already confirmed that a Sipp will be “added in due course”, and when it does, it will become even more difficult for advisers to ignore. The LifeStrategy range is already popular with advisers, and if this continues then we could see advisers starting to come to the conclusion that a “platform” offering custody for 15bps is the best recommendation to be made.
The lack of functionality to facilitate an adviser charge is another barrier, but is this enough to justify recommending a more expensive platform elsewhere? The difference in costs outlined above is significant, and the client can always pay the adviser charge directly.
It will be interesting to see whether the advised segment is one it goes after. If it gets the balance right between disruption and supporting advisers, then it could be a successful route for it to take.
Mike Barrett is a consulting director for the lang cat
Key points
Vanguard announced in May its launch into the D2C platform space.
The news knocked 8 per cent off the share price of Hargreaves Lansdown.
A Sipp function will be added at some point in the future.
This article has been amended to correct the mis-typing of an acronym
