Vanguard officially entered the “robo-advisor” arena this month with the launch of its Vanguard Personal Advisor Services product — a hybrid offering that has been in testing for a couple of years now.
The robo-advisory market grabbed the spotlight earlier this year when Charles Schwab Corp (NYSE:SCHW) launched its Schwab Intelligent Portfolios service, which uses an “advanced algorithm and the professional insight of the Charles Schwab Investment Advisory, Inc. (CSIA) team.”
Vanguard insists its product is something different, even insisting that Vanguard Personal Advisor Services isn’t a robo-advisor – but instead a mix of algorithms with a personal touch.
But that’s the marketing department speaking. Practically speaking, what are you actually getting?
First off, Vanguard Personal Advisor Services has a $50,000 minimum and charges 30 basis points on top of fund expenses. Period. What we know is that Vanguard is focused almost exclusively on using index funds, offering regular re-balancing and providing what it calls personalized services with a “real” advisor, many of whom are CFPs and have a minimum of three years of “relevant” experience (whatever that means).
However, unless you have at least $500,000, you are “serviced” by a team, which means you aren’t really getting personalized service by someone who knows you, but by the person who picks up the phone when you call and who reads up on your profile in their computers as need be.
In my view, Vanguard Personal Advisor Services is a plain-vanilla product, offering small savers a plan for their money and someone to talk to when they have lifestyle changes or they get anxious about the markets.
I don’t see Vanguard offering “wealth” advisory services, as my guess is that the planners will be held to tight reins on what they can and can’t say to a client. Not only will the portfolios be plain-vanilla index-based portfolios, but so will the advice.
And you can pretty much forget about being advised to invest with Vanguard’s best active-fund managers. This is indexing, through and through.
Also, remember that many robos will make a strong case for “regular rebalancing,” yet our research indicates that while rebalancing may reduce risk/volatility slightly, it also reduces returns.
Plus, no matter how “sophisticated” their computers may try to be, at some point you run out of high-cost shares, and all that rebalancing is going to have a tax cost. In fact, Vanguard Personal Advisor Services really offers investors a more expensive Target Retirement or LifeStrategy portfolio with a “personalized” advice component on the side.
From a performance and a tax standpoint, investors may actually do better investing in one of Vanguard’s funds-of-funds, where cash flows provide automatic rebalancing without the investor having to rejigger their own portfolio.
So before you consider the Personal Advisor Services, know what you’re getting:
- Low costs, yes, but you get what you pay for.
- Plain-vanilla, index-based portfolios akin to Vanguard’s funds-of-funds.
- Plain-vanilla “advice” that is controlled from the top down.
- A rebalancing feature, but one that doesn’t reduce risk that much, reduces returns and could create a tax liability.
- Recommendations limited to Vanguard’s offerings — there’s a bit of self-dealing here, not independent advice.
In the end, this is a product that appeals to those with small savings ($50,000 to $100,000 or so) and want truly basic investment advice with a little human contact.
For all the “personalization” Vanguard offers, however, Personal Advisor Services clients are still just cogs in the machine.
Daniel P. Wiener is editor of The Independent Adviser for Vanguard Investors, a monthly newsletter that keeps abreast of recent developments at Vanguard and the annual FFSA Independent Guide to the Vanguard Funds.