Did you hear the news?
The world of robo-advisors might have a new entrant and it's a huge one – Vanguard.
Until recently, it was just a filing and a brief page on the internet but it appears Vanguard has now begun rolling it out starting with a brochure that explains how it works. It's quite long and detailed, so great if your want to read it yourself, but we've dug deep to give you a better understanding of what they offer.
What is Vanguard Digital Advisor?
Vanguard Digital Advisor will ask you a series of questions to establish risk tolerance and then recommend a portfolio based on your risk attitude assessment. These data points include “information relating to your family, age, risk tolerance, specific financial goals, investment time horizon, current investments, tax filing status, other assets and sources of income, investment preferences, planned spending, and existing financial/investment accounts.”
You can also set financial goals, like saving for retirement, where they will ask how you'd respond to hypothetical scenarios to further assess your risk tolerance. It then appears you will be put in one of five risk attitude categorizations to build an asset allocation. You can review the different categorizations and pick a different one if you choose to (or if Vanguard is unable to assess your risk tolerance).
This all sounds like pretty standard robo-advisor stuff. Ask a few questions, establish some goals, assess risk, and build a portfolio to meet those.
There are accounts that Vanguard Digital Advisor can access and transact on (“Eligible account types include: individual, joint accounts with rights of survivorship, traditional IRA, Roth IRA, 401(k), and Roth 401(k) accounts authorized by plan sponsors”) but Digital Advisor can also include accounts it can't transact on. With those, they can include those accounts in goal forecasting. This is also very familiar because it's similar to what Personal Capital does with it's tracking and goal success forecasting.
Also, as a retail investor, Vanguard Digital Advisor requires a minimum of $3,000 to start.
What does it invest in?
As you'd expect, Vanguard Digital Advisor will rely on exchange-traded funds. ETFs are useful for this because they have no minimums and low fees. They also make tax-loss harvesting easier.
Specifically, it will recommend a mix of:
- Vanguard Total Stock Market ETF
- Vanguard Total International Stock Market ETF
- Vanguard Total Bond Market Index ETF
- Vanguard Total International Bond Index ETF
(sounds a lot like a simple three/four fund portfolio)
Vanguard Digital Advisor will not recommend “individual securities, bonds, CDs, options, derivatives, annuities, third-party mutual funds, closed-end funds, unit investment trusts, partnerships, or other non-Vanguard securities.”
Some may point to this and say – “hey, why is Vanguard only offering their own funds?”
Just look at the expense ratio of their funds:
- Vanguard Total Stock Market ETF – 0.03%
- Vanguard Total International Stock Market ETF – 0.09%
- Vanguard Total Bond Market Index ETF – 0.035%
- Vanguard Total International Bond Index ETF – 0.09%
Those expense ratios are ridiculously cheap. (a few years ago, a lawsuit alleged that Vanguard was “avoiding taxes” by charging too low a fee!)
Digital Advisor Fees
Vanguard is aiming for an annual net advisory fee of 0.15% fee, “although actual expenses will vary based on the specific holdings in your Portfolio and the net advisory fee you pay may also vary by enrolled account. The combined annual costs of enrolling in Digital Advisor and investing in Vanguard Funds in the Portfolio will be 0.20% for RIG Clients.”
So, Vanguard Digital Advisor will charge 0.15%, the underlying fees (for the funds) will be around 0.05% (blended average), so they expect the fee to be ~0.20% after you include everything. This is lower than the 0.25% charged by the most popular robo-advisors (which doesn't include the fees you pay for the underlying funds they choose).
What about Personal Advisor Services?
If this all sounds somewhat familiar, it's because Vanguard currently offers a service called Personal Advisor Services.
Personal Advisor Services connects you with a financial advisor. It starts with you working with a human Vanguard advisor to understand your financial situation. The advisor works with you to create a custom plan. Once you agree to the plan, the advisor helps to build your portfolio with a mix of stock and bonds according to that plan, all tracked through Vanguard. The advisor will review and rebalance your portfolio on a regular basis and you get quarterly progress reports.
It's very much like today's robo-advisors except you get a person (I recognize how silly that statement sounds, but a lot of folks are more familiar with robo-advisors than human ones!). I suspect some of the optimization (like harvesting, rebalancing) is done by algorithms. It's never explicitly stated but there's no reason human intervention is required.
The minimum is $50,000 and the fees start at 0.30% on assets up to $5 million. The Personal Advisor Services is comparable to Betterment (0.25% – 0.40%) and Wealthfront (0.25%) but you work with a person, rather than an algorithm. (and you invest in a handful of Vanguard funds)
Vanguard Digital Advisor is cheaper but does not include a person.
Robo-advisors are very popular these days and it's no surprise that Vanguard is offering a new service.
A few things that jump out – the fees are lower because Vanguard structures their fees differently. 0.20% vs. 0.25% may not seem like a big deal but the other roboadvisors charge a fee on top of the underlying funds.
For example, Betterment charges their advisory fee and you still pay the expense ratios of the underlying funds. If you're paying 0.25% to Betterment, you're also paying 0.04% to Vanguard if they put you into VTSAX. On the other hand, Vanguard owns the underlying funds and will “reduce your gross advisory fee by the amount of revenue that Vanguard (or a Vanguard affiliate) collects on your Portfolio in order to calculate the net advisory fee.” In other words, they will give you credit for the fees you pay for the underlying funds and your “all-in” cost will 0.20%.
One of the big reasons why I haven't used a Robo-advisor is because of the added complexity. If you look at these robo-advisor portfolios, they're waaaaay too complex. That first Betterment account has a dozen funds. That's going to create some tax filing headaches (not unbearable but it'll be annoying) down the road. I like that Vanguard is sticking with four of their best funds thought that will make tax-loss harvesting a little trickier.
Lastly, I already use Vanguard so having it all remain under one roof is appealing.
I'll have a better take on this whenever it officially rolls out.