In early January, Vanguard made a major announcement that got the market talking; not an usual thing for the disrupter.
This time it is planning to enter the advice market and people are wondering what it will mean for the sector.
Confirming its plans, Vanguard said it had recently received the necessary regulatory permissions from the Financial Conduct Authority to provide retail advice in the UK, and is in the early stages of developing a proposition.
But it currently does not have a timeline to bring a proposition to market.
Kenneth Lamont, senior passive fund research analyst at Morningstar, says: “Following the launch of the European fund business in 2012, and then the [direct-to-consumer] platform in 2017, the move into the pensions and advice space is a logical step for Vanguard.
“Margins in the wealth management space remain bloated and appear ready for disruption. Compared with the US, fees and the cost of advice in Europe are higher, particularly for new savers.”
Filling the advice gap
Vanguard is expected to try to fill the ‘advice gap’, targeting the lower end of the financial advice spectrum.
In the US, its hybrid robo-advice/human adviser Vanguard Personal Advisor Service is offered to those with assets of more than $50,000 (£38,100) and is charged at a percentage of assets rather than at a fixed fee, which favours those customers with a lower net worth – good news for customers who may be in a position to afford quality financial advice for the first time.
Even those that do not choose to take up the service will benefit from the increased competition as rivals are forced to justify their fees, Mr Lamont adds.
Key Points
- Vanguard is getting into the financial advice arena in the UK
- The service is likely to be targeted towards the mass affluent market
- Robo-advisers have not been successful in the UK
Ian McKenna, director of the Financial Technology Research Centre, says: “You will get more consumers looking at what they are paying for their financial advice.”
Echoing his thoughts, Paul Stocks, financial services director at Dobson & Hodge, comments: “The beauty of Vanguard is it is already an asset manager. The platform it is talking about will probably add downward pressure on fees.”
Mr Lamont believes the rationale behind Vanguard’s plans is that the UK market – home to Vanguard’s European headquarters – is the natural launch point, particularly given the success of the D2C platform over here.
He also expects advisory services to be rolled out across Europe in the coming years.
“One thing we know is that Vanguard won’t be rushed,” he adds. “The company has a history of taking its time when launching new products and services. This is typified by the delay in launching the much-anticipated [self-invested personal pension] product in the UK, which is now expected to launch later this year.
“The bad news for incumbents is that Vanguard tends to become a disrupter in every market it enters, with its no-frills, transparent, low-cost approach to financial solutions.”
But it is not bad news for advisers. In fact, it presents an opportunity for IFAs to show their value, as Mr Lamont says the “good news” for rivals is that any wealth management offering will focus on the underserved mass market segment, leaving plenty of room for more bespoke offerings.
“In fact, many of Vanguard’s potential customers are not currently served at all, and will not have to be poached from rivals,” he adds.
‘Fishing in a different pond’
Mr Stocks says that adviser value is in helping clients with complicated and changing needs as their life circumstances change and they get older.
He adds: “Vanguard will probably be fishing in a different pond to us, because when we sit down with clients with quite complicated financial planning and tax situations, you need to get your head around everything.
“Where we are doing all the fetching and carrying, a lot of clients come to us because they are time poor. They are not just asking for our expertise, but our time to do the work for them. With a robo-adviser, it does not do that.”
Mr McKenna says: “Advisers that have a good customer proposition and high levels of personal service do not have anything to worry about in direct terms other than this will drive price compression.”
Although many advisers like Mr Stocks are fairly confident that Vanguard’s plans are unlikely to disrupt their business, Mark Polson, principal at the Lang Cat warns advisers not to rest on their laurels.
He points to the Vpas offering as an example of a low-cost model that could be very popular with UK investors.
In a note on the Lang Cat’s website, Mr Polson says: “That service is much more sophisticated than folk are saying it is, especially those dismissing it as a sales funnel for VG funds. It is that, to be fair, but it’s quite a lot more besides.
“For a start, you get financial planning. Over the phone, unless you’re pretty rich – and lots of Vpas investors are, plenty of $10m portfolios knocking around – and it can’t do everything a [registered investment adviser] can do, but it’s not bad. This costs 0.3 per cent a year all in.
“As a client you have a new choice. You can keep paying 1.8 per cent and keep getting what you’re getting: a nice independent adviser who, if you’ve picked well, will do lots of holistic stuff, a big chart with red and green bars on and more. Or, you can pay one-sixth of that and get most of it without the extra nice bits.”
Mr Polson continues: “The US isn’t the same as Britain. But I do wonder if the UK investor is offered a ‘proper’ advice service – not full financial planning, but decent advice – which ends up in low-cost, non-toxic products that come in at [say] 0.3 per cent all in, whether that won’t drive some to work out what it is they really want.
“It might be good news and lead to clients recommitting to their adviser if they had been wavering but weren’t sure what else was out there. Or it might be less good news.”
Feeling the heat
Robo-advice, which is an already under-pressure business model, could feel even more heat from Vanguard’s plans.
Moola is the latest robo-adviser company to announce that it is set to close, at the end of February. Investec also announced last year it was closing its Click and Invest robo-advice business.
Offering her analysis of the situation on Twitter, Holly Mackay, managing director at Boring Money, said slow growth rates and high acquisition costs have made this “most fashionable” sector look fragile, adding that 2020 will see a different emerging approach to digital advice, more closures and more mergers and acquisitions.
Mr McKenna adds: “The people [Vanguard’s plans] will put pricing pressure on are other robo-advisers in the UK.
“Vanguard is a hugely successful business with incredibly deep pockets. One thing people always talk about with robo-advice is that they struggle with the cost of customer acquisition.”
Although details have not yet been ironed out, Mr McKenna says Vanguard’s venture will bring in more savers into the market.
Vanguard’s low-cost, transparent and no-frills approach has been enormously successful in most markets it has entered. It would be a brave person that would bet against the company this time.
Ima Jackson-Obot is deputy features editor of Financial Adviser and FTAdviser
