If some experts are to be believed Vanguard’s new low cost, direct-to-consumer investment platform will set the cat among the pigeons when it comes to retail investment.
After all, if a low cost, passive-based D2C service does the trick for retail investors, why bother paying for a costly financial adviser or more expensive platforms?
My esteemed fellow columnist Jeff Prestridge commented recently in these pages that the impact of Vanguard’s new service could affect companies such as the highly successful Hargreaves Lansdown.
He’s right.
Some comments might also imply that Vanguard is moving away from advisers and placing more faith in a low cost D2C offering. I know this is not the case. How? Because Vanguard have said so themselves.
At a recent investment conference I attended in the City, a senior Vanguard manager, head of business development Ryan Barrows, said financial planners and indeed all advisers would remain “vital” to Vanguard’s future, not an afterthought.
Financial planners and indeed all advisers will remain “vital” to Vanguard’s future, not an afterthought.Not only would they remain vital, their role in placing funds with Vanguard would likely grow in future years despite the impact of robo-advice and D2C offerings, he said.
He told the conference of leading planners and fund managers: "The role of advisers will remain vital for us. Technology will likely have a role but the human adviser is here to stay.
"We think that investors need help. The largest portion of our growth over the last 10 years has been with financial advisers.
"Advisers add alpha and we believe that good advice delivers about 3 per cent of alpha for investors a year. We see a huge value for money argument in the advice space."
In other words, Vanguard and investors need advisers just as much as advisers need them.
Sceptics may say, well all right; Vanguard says one thing and does another, but the strategy of Vanguard in the US has been to expand and develop its Vanguard Personal Advisor service where much is automated, but a human financial adviser is available to help investors when they get stuck and to provide a financial planning service when needed.
In the US, the professional investment advice from a Vanguard adviser costs 0.3 per cent of an investor’s assets under management annually. Vanguard says this is less than one-third of the US industry average of 1.02 per cent. It may seem low to some UK advisers.
It seems likely to me that the main threat to advisers in the UK will be a UK launch – if it happens – of the Vanguard Personal Advisor Service which may do quite a bit to shake up the UK market.
It would seem logical to build up a business of D2C investors and then offer them financial advice as their investment and portfolio needs became more complex. Not a million miles away from the Hargreaves Lansdown model or indeed that of Fidelity FundsNetwork or several others.
However, Vanguard is hungry for growth and planners and advisers will need to think carefully about their models and about what differentiates them from the likes of Vanguard and others and where they add true value for clients.
For many financial planners, their core value is in offering a professional, expert eye in helping people deal with all sorts of complex financial matters, ranging from how to invest a substantial nest egg to how to plan to mitigate inheritance tax or fund retirement dreams.
The D2C ‘bolt-on’ advice services may struggle to deliver the comprehensive and personalised levels of service many advisers offer but, conversely, they could be a lot cheaper, particularly when it comes to simpler services such as portfolio review or asset allocation.
I have not dealt with the issues around active investment until now, and deliberately so. It is a hugely complex area and while, like Jeff, I do not believe active managers will be consigned to history any day soon, I do think they have a battle on their hands.
The rise of the passives has been steady but inexorable. Many investment experts believe these funds will increasingly be managed by ‘investment robots’ – artificial intelligence fund managers if you like – which will cost a fraction of human fund managers.
It has already been pointed out that, of course, active managers could be replaced by artificial intelligence robots but here I believe the threat is less immediate.
It is hard to image a robot jumping on an A380 to go and visit a company in Hong Kong before investing.
Looking under the bonnet of companies and kicking the wheels is something best done by human managers and that will not change.
Innovation and change in the delivery of financial advice and investment propositions may well be a worry and a challenge to some but it’s a sign of vigour in the sector. Competition for advisers is nothing to fear.
Kevin O’Donnell is a financial journalist
