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Vanguard's Robo-Advisor: Tailored to Boomers

The robo-advisor​ platform is a major disrupter in the financial advisory world. These online services offer automated, algorithm-based portfolio management advice for lower fees and bridge the gap between do-it-yourself financial planning and full-service financial advisors. The newest entrant into the robo-advisor arena is a product from low-cost index fund pioneer The Vanguard Group.

Vanguard Personal Advisor Services is targeting a neglected niche in the robo-advisor world: The Baby Boomer. This segment of the market, born between 1946 and 1964, has substantial wealth. But a portion of this demographic has been shut out from the typical money manager who charges a fee upwards of 1% of assets under management (AUM) and often requires a minimum of $500,000 to $1 million in assets just to walk through the door. (For more, see:Ways Advisors Should Evolve in 2015 and Beyond .)

According to Forrester Research’s Bill Doyle, Vanguard Personal Advisor Services is set to transform the advising world by offering customized financial advice at a lower price to millions of people with lower account balances. (For more, see:Who Wins with Robo-Advisors? Everyone? )

What's it All About?

Vanguard maintains that it will to add a personal touch to the robo-advisor landscape. According to its website, this new robo-advisor product “[combines] the personal attention of an advisor with powerful technology — all at a low cost.” (For more, see:Robo-Advisors and a Human Touch: Better Together? )

Clients meet with an investment professional to map out future goals — which may include investing for retirement, financial management, managing a nest egg while in retirement, and/or saving for college — and create an investment plan to meet those goals. (For related reading, see:Best Savings Priority: Retirement vs. College Fund .)

The client-advisor relationship is the selling point of this robo-advisor platform. Vanguard promises to customize the financial plan and help you manage your investments now and through retirement. The required $50,000 investment minimum to participate is well below the comparable programs of many financial advisory firms. (For related reading, see:How Financial Advisors Can Adjust to Robo-Advisors .)

How Does it Work?

Vanguard has put in place an easy-to-follow step-by-step process to get going:

  1. Meet with an advisor in person or by phone/teleconference.
  2. Discuss personal financial situation and goals.
  3. Create personal and customized financial plan.
  4. Put plan into action. (Your involvement at this point is up to you; Vanguard allows you as much or as little input as you wish.)
  5. Advisor monitors and tracks portfolio’s progress and keeps you updated.
  6. Rebalance​ portfolio regularly.
  7. Adjust portfolio in response to life changes.

Benefits

There’s abundant research demonstrating that investors can be their own worst enemies. In general, investors underperform the market because of fear, greed and other behavioral biases. Market participants get scared when their stock mutual funds fall in value and might sell at the bottom, only to wait until a rebound is well on its way to buy back in. Vanguard says that their personal advisors will help prevent clients from making costly investment trading errors and thereby save them money. (For related reading, see:Behavioral Finance: Key Concepts — Herd Behavior )

On its site, Vanguard puts forth a hypothetical example

to demonstrate potential cost savings: A client with a $250,000 portfolio would save $1,725 using Vanguard Personal Advisor Services when compared to the industry average for a managed portfolio. Over a 20-year period, including compound returns, Vanguard suggests you’ll end up with $93,011 more in your portfolio than if you’d gone the traditional advisory route. (For more, see:How to Calculate Your Investment Return .)

Vanguard's fee of 0.3% of AUM is well below the industry average, even when the individual investment management fees are tacked on. In general, Vanguard’s index mutual fund and exchange-traded fund (ETF) fees are among the industry’s lowest. For example, the Vanguard Total World Stock ETF (VT) has a rock-bottom annual expense ratio of 0.17%. Also, it’s tough to beat the 0.05% annual fee of the Vanguard Total Stock Market Index Fund's (VTSMX) Admiral shares. (For more, see:Index Funds vs. ETFs: What's the Difference? )

There’s an added bonus for investors with more than $500,000 invested in Vanguard’s Personal Advisor Services. Each of these wealthier individuals gets his own personal financial advisor; those with less than $500,000 are assisted by a team accessible through a toll-free number. (For related reading, see:High-Net-Worth Client Tips for Financial Advisors .)

Vanguard maintains that with the advisory platform, investors will earn more and pay lower management fees than comparable services. They will do this by serving as the investor’s "partner and mentor," helping to minimize taxes, and guiding the investor in smart asset withdrawal strategies. The firm states that its tax-planning strategies are worth approximately 1.45% in net portfolio returns. (For related reading, see:Safe Tax Planning for High-Net-Worth Filers .)

Competition

Many advisors charge lower fees and funnel the investors’ dollars into a variety of low-cost index funds, in line with their risk profile. For example, Wealthfront and Betterment, are among the lowest-fee platforms. Wealthfront charges 0.25% on assets over $10,000, whereas Betterment charges between 0.15% and 0.35%, depending on AUM. Neither of these robo-advisors offer access to individual advisors. Charles Schwab’s newly launched Intelligent Portfolios has no overall management fee and makes money on the underlying fund fees. (For more, see: Wealthfront vs. Betterment.)

Personal Capital is probably the closest competitor to the Vanguard offering. Personal Capital charges a fee of 0.89% of AUM on the first $1 million, including trading costs. The firm's selling point is that it customizes index-inspired baskets of individual stocks for each investor, and it purports to give the investor greater opportunity for tax-loss harvesting. (For more, see:Pros and Cons of Annual Tax-Loss Harvesting. )

The Bottom Line

Finally, investors with moderate incomes have a chance to compete with the wealthy for quality financial advice. Vanguard benefits from consumers’ confidence in the firm as a low-fee industry leader. Vanguard Personal Advisor Services saw net inflows of $7 billion as of March 2015, and it already had $10 billion from the firm's legacy financial planning services. In sum, Vanguard’s entrance into the rapidly expanding robo-advisory world is an example of how consumers benefit as competition in the financial advisor landscape intensifies. (For more, see:The Future of Robo-Advisors: Future Advisor .)


Category: Advisor

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