Vanguard's hybrid advisor misses the mark with some clients

Erich Balchunas, senior ETF analyst at Bloomberg Intelligence, has described Vanguard as the Amazon of the investing industry: once it enters a space, rivals brace themselves for fierce market-share battles — usually fought and won on price.

That low-price success strategy is reflected in the company’s hybrid robo-advisor, called Vanguard Personal Advisor Services (PAS), which has been available south of the border since 2015. According to the Philadelphia Inquirer, annual advisory service costs for PAS range from 0.05% on assets of US$25 million and above to 0.3% on assets below U$5 million, with US$50,000 as the minimum account threshold.

The platform has proven extremely popular; as of Q1 2018, it oversees US$106 billion, with 90% of its assets coming from clients who already had accounts with Vanguard. Sharing their thoughts on PAS, so-called “Bogleheads” said it was a useful tool for those who want to put money to work in the stock and bond markets, but don’t understand asset allocation, to get comfortable.

“Once they do it themselves for a year or two, some keep PAS while others stop using it and change funds on their own,” the Inquirer said.

PAS services, which include unlimited access to advisors — dedicated ones for those with at least US$500,000 in assets — are also useful for clients who want to be hands-off investors. “They will tell you what investments to make, and contact you when rebalancing is necessary to meet your set asset allocation,” one person said on Bogleheads.org.

“Throughout our working years, I loved the saving and investing part but, now that I’m retired, have no desire to ‘work’ at the income-management part,” another said.

As good as the service is, signing up for it comes with potentially steep switching costs. Existing Vanguard clients who are happy with the firm’s actively managed funds may resent having to sell them to enrol in PAS.

“Basically PAS is a plain vanilla low-cost asset-allocation service, and there’s very little customization,” explained Dan Wiener, publisher of the Independent Adviser for Vanguard Investors newsletter. “The advisers they employ have little wiggle room in terms of building your portfolio.”

Another issue is the possible capital-gains tax hit for people who have to sell their holdings as they switch from another brokerage. As Terri McDermott, director of wealth planning at Fortis Wealth put it:

“As a client, I would want a deeper analysis of the tax impact on my particular situation, not a vague promise that I will be ahead at some time in the future.”

Related stories:
Move on from siloed approach, IIAC urges regulators
Embrace AI or risk irrelevance, advisors warned