FSRankings spoke with Frank Kolimago, head of Vanguard’s Personal Advisor Services, Vanguard’s robo-advisor offering.
1) What’s the latest AUM?
As of June 30, 2017, Personal Advisor Services (PAS) had $83b in AUM.
2) Why are you so willing to share your AUM for VPAS – is it a strategy to suggest consumers should go with a winner, given how far VPAS has outpaced the pure play robo-advisors?
At Vanguard, growth is not an objective but rather the outcome of our efforts to offer a service with a compelling value proposition. As clients entrust more assets to us, we identify it more as an indicator that PAS is resonating with investors who are seeking high-quality, affordable advice. (For the record, we share PAS AUM on a reactive basis to the news media. The figure is not published on Vanguard’s website or used in our marketing materials.) Additionally, we publicly disclose our assets under management in our required annual regulatory filing.
3) What is Vanguard’s take on Fama-French / Smart Beta? Has Vanguard’s research uncovered any benefit to value, size, and momentum?
The portfolios we build through PAS are based on Vanguard’s time-tested investment methodology of low costs, balance, broad diversification, and tax efficiency.
Our focus with equity investing is to capture the equity risk premium across the globe, which we believe is a long-term, repeatable reward for taking on equity risk. On the fixed income side, we position portfolios to capture the asset-class return of the investment-grade fixed income universe.
While we do offer factor exposures in various forms—quantitative investing strategies, value/growth/size indexes, fixed income funds based on maturity and credit quality, etc.—we tend to focus on the broad asset allocation decision in advised relationships, especially in PAS. We view factors as an active option that can provide additional ways for suitable investors who understand the trade-offs to meet their longterm objectives.
4) Would Vanguard consider direct-investing, which further reduces management fees of funds and also enables tax loss harvesting? (Our apologies if VPAS already supports both)
We continually evaluate new products and services that have the ability to help our PAS clients meet their investment goals. At this time, there are many issues to consider with direct investing—cost, diversification, ability to capture equity returns (i.e., tracking error), tax-loss harvesting, etc. The benefits that many attribute to direct indexing are often very sensitive to the assumptions used. For example, many direct indexing proponents assume that all losses realized can be used immediately to offset gains, which is almost never the case.
While there may be benefits to tax-loss harvesting, many of these benefits can be captured adequately using broad-based portfolios like mutual funds or ETFs.
The challenges in implementing a direct indexing approach is that it often requires a significant amount of capital to appropriately diversify, and ongoing contributions to the account are necessary to establish new tax-lot positions.
5) Aside from state-specific muni-bond funds, does VPAS have any other approaches to achieve tax efficiency?
Yes, we believe that maximizing after-tax returns is achieved in several ways beyond the use of muni bonds. Examples include asset location, break-even analysis of existing client holdings (compares taxes on realized gains vs. costs savings with lower cost Vanguard funds), use of rebalancing bands and thresholds to minimize transaction costs, as well as tax-efficient withdrawal strategies in retirement.
6) How are most Vanguard funds distributed to retail investors (e.g. 401k plans, human RIAs, etc) and how does VPAS affect those distribution channels? Have you had pushback from human RIAs?
Retail investors have access to Vanguard funds and ETFs through a variety of ways. Approximately one-third of Vanguard’s overall asset base of $4.5 trillion as of July 31, 2017 is invested through direct retail relationships, while an additional one-third is invested through our Financial Advisor Services business (where our funds are sold through external advisors and other intermediaries).
We believe that the universe of investors who need advice is sufficiently large – and growing – offering more opportunities to all advisors. In fact, our Financial Advisor Services business is one of the largest and fastest growing parts of Vanguard. Vanguard has been a vocal proponent of the value of advice and the value of an advisor. Through our well-received Advisor’s Alpha research, we believe we have successfully quantified the value that an advisor can provide through cogent wealth management.
We also believe investors have varying preferences when working with a financial advisor, and access thresholds can vary. Some investors prefer face-to-face interactions through traditional advisors who often live and work in the communities alongside their clients. PAS is a different model that appeals to a different set of investors; specifically those comfortable with Vanguard, Vanguard investments, and a virtual relationship with an advisor.
Overall, Vanguard is a strong advocate for advice, and the growing need is offering more opportunity to advisors.
7) Some robo-advisors like Hedgeable have attempted to apply the latest exciting area – AI – towards portfolio management and security selection. What is Vanguard’s take on the role of AI in wealth management?
As an organization that focuses heavily on technology, we understand the appeal/attractiveness of AI and its ability to enhance the wealth management client experience over time. However, as mentioned earlier, the portfolios we build through PAS are based on Vanguard’s time-tested investment methodology of low costs, balance, broad diversification, and tax efficiency. Our core investment approach is to build a balanced portfolio using low-cost index mutual funds/ETFs and active mutual funds.
We believe low-cost investments such as these provide diversified investment exposure to a wide variety of market benchmarks, a high potential for tax-efficiency, low manager risk, and low minimum return variability from the market over the long term. Taking a strategic, low cost asset allocation approach with a focus on specific client goals, is how PAS believes clients can maximize their chance for long term success.
8) FSRankings understands and agrees with the argument for passive investing – what percentage of the investable universe should stay actively managed so that security prices can continue to more or less match their intrinsic value, which allows passive investing to work?
We wouldn’t say that there is a particular tipping point that can be identified, though such a point is far off. Even today with nearly 15% of the global equity market indexed, only about 5% of the trading volume of individual U.S. equities reflects activity of passive investors. In other words, 95% of the daily price discovery is being made by investors assessing the relative value of individual securities (i.e., active views).
9) Will VPAS advisers proactively reach out to customers during times of market distress to coach its customers to stay in the market and/or disable access to client funds in times of financial distress?
Clients enroll in PAS to partner with us to recommend and implement a financial plan for their portfolio. The primary benefit of partnering in this manner is that by giving all clients the ability to speak with our advisors, we can then serve as behavioral coaches for them in times of market volatility. We understand that investing invokes emotion, and our advisors strive to help their clients maintain a long-term perspective and a disciplined approach, particularly in times of market volatility. While we urge clients to maintain that long-term focus and to not change course solely on account of short-term market events, we do not restrict clients’ access to their accounts.
Our advisor team (approximately 525) works to develop an understanding of the unique sensitivities of the clients they serve, and they reach out in ways those clients will appreciate (e.g., by phone, videoconferencing or email) to provide reassurance about the long-term merits of their investment strategy. Additional outreach includes other web-based tactics—distributing communications directly to clients or posting them online, presenting prepared videos online and live webinars—for PAS clients.
10) What percent of current AUM comes from existing Vanguard customers vs. new ones?
Since the launch of PAS in 2015, the vast majority of our PAS clientele have come from our existing Vanguard client base. We attribute much of this crossover to the appeal of the service and the value clients see in having an advisor, often as they get closer to or transition to retirement.