While active fund managers are getting active, as they have to do to justify their existence, the announcement that Vanguard, the pioneer of low cost index funds in the United States, is entering the platform market in the UK for the first time, offering access to an online investment service for an annual platform fee of just 15 basis points, is worthy of note. Over time this kind of offering, and others like it, seriously threaten to undercut the conventional offerings of traditional financial advisers and wealth managers, as well as that of other platforms, including the market leader Hargreaves Lansdown.
The service gives private investors direct access to the full range of Vanguard funds, including its Life Strategy range of asset allocation funds, target retirement funds and a number of ETFs and actively managed funds (the most interesting of which are style funds, tracking value, low volatility and momentum strategies among others). The Life Strategy funds effectively offer investors a one-stop shop solution to their investment requirements, with a mix of bonds and equities that adjusts automatically over time with age and life expectancy.
Asset allocation is of course a key part of what traditional financial advisers and wealth managers do for a much larger annual fee, but there is little evidence that their skills add much value in many cases. The Vanguard offering not only has a low annual fee, but it is effectively capped at £375 for any investment portfolio over £250,000, whereas adviser fees are typically ad valorem, a percentage of the invested assets. That means that the cost of the service quickly runs into thousands, rather than hundreds of pounds, for portfolios that are anywhere over £250,000 in size.
According to Holly Mackay, founder of the Boring Money website, said: “The ability to access fully diversified Vanguard LifeStrategy funds at an all-in fee of 0.37 per cent (note: this is made up of the 0.15% service fee plus the 0.22% management charge of the Life Strategy funds) rips up the rule book and puts the pressure on higher charging wealth managers to justify their charges and demonstrate value. This is dignified, low-key disruption which will set the cat amongst the pinstripe-suited pigeons.”
While this is an important step down the road towards a full low cost advisory service, Vanguard – which was founded by Jack Bogle (pictured above) in the 1970s – said however that it has no current plans to introduce its robo-adviser service in the UK. Its Personal Adviser service has been hugely successful in the United States, offering investors access not just to low cost funds, but also basic personal advice for an all-in fee of around 30 basis points. As someone who has followed and written about the relentless onward march of Vanguard for more than 20 years, I am pretty sure it is only a matter of time before it chooses to take this next logical step in the UK. That will go a long way towards filling the famous “advice gap” that makes it difficult in practice for anyone with less than £250,000 or so to find cost-effective advice on how to invest their money.
Just as the growth in passive funds puts active fund managers on the defensive to justify their fees, so the emergence of a low cost online asset allocation service poses the same challenge to advisers and wealth managers, who as asset allocation increasingly becomes commoditised will need to make a case for the value of the other services (such as financial planning) they offer. 21st century investing is already starting to look very different to what it was in the 20th century, and is none the worse for that.
Jonathan Davis 