Roth: Vanguard's McNabb is Right About Robos
Should advisors fear digital wealth incarnations such as Vanguard's Personal Advisor Services?
By the end of 2015, the new platform had approximately $31 billion in total assets under management, with $21 billion from new money.
When Vanguard CEO Bill McNabb spoke at the Inside ETFs Conference in Hollywood, Fla., he said there are five forces at work changing the landscape of serving investors of today, and especially of tomorrow:
- Low cost revolution. Investors expect to pay less for investment funds and services. The emergence of robo advisors and growth of indexing illustrates this.
- Advisors must adapt. Technology is lowering the cost of advice and advisors should harness that technology and automate when possible.
- Investing is less complex. Model portfolios are now being built with simple and ultra-low cost funds. Investments are commoditized.
- Planning is now more complex. As baby boomers begin retiring, planning components such as tax-efficient withdrawals is critical.
- Advisors must tell their story to differentiate themselves. McNabb referenced a Vanguard paper on Advisor's Alpha showing advisors can add roughly three percentage points a year in return through means such as tax-efficiency, behavioral coaching, portfolio construction and rebalancing, and assistance in savings and spend rates.
After his talk, McNabb was asked about Vanguard's relatively new Personal Advisory Services and whether it competes with advisors. McNabb stated Vanguard is helping clients that most advisors couldn't help since it has now opened its services to investors with only $50,000.
WHERE ADVISORS ADD VALUE
I'm largely in agreement with McNabb's message and have written about where advisors add value. Though I've always said investing was simple, I never said taxes or controlling emotions were. Portfolio construction is simple in theory and would be simple in practice if a client came to me with all cash.
I would, for example, merely build a stock portfolio out of total U.S. and international stock funds (not even factor weighted). But rarely does that happen. Advisors must take into account tax implications, penalties, gated redemptions, and other issues in deciding what can be sold, and then the new portfolio must be constructed with a combination of existing holdings and new holdings. For this reason alone, a good advisor should have no fear of any robo advisor that nearly always starts from scratch with a "model portfolio" irrespective of the consequences.
While the markets aren't predictable, human behavior is. Most people will continue to overestimate their risk tolerance in good times only to want to bail when markets tank. Helping the client construct a portfolio they can live with and stick to is critical. Buying after plunges and selling after surges as part of rebalancing has added significant returns in the past. Human behavior is likely to continue so, in this case, I think the past does bode well for rebalancing to work in the future.
I sat down with McNabb after his talk and asked him if he thought the future of financial advice would ever shift to a fee for service hourly model like most other professions? After all, the advisor's alpha services provided are not necessarily dependent upon asset size. McNabb noted that it took a long time for the industry to transition from commission to the percentage of assets model and thought another transition soon was unlikely. I’m an hourly advisor who happens to agree with him, though I would love to see it.
Consider Vanguard's Personal Advisory Services. It is not a pure robo advisory platform and provide assistance in the same areas noted in the advisor's alpha paper McNabb referred to. And there is some evidence that this new service includes high net worth individuals as clients.
My view is that good advisors should not concern themselves for two reasons. First, there is as shortage of good advisors. I'm talking about the ones who do the services in the Advisor's Alpha paper. That takes a lot of direct contact and communications with the clients and their other advisors such as CPAs and estate attorneys. That’s hard to automate.
The second reason is that the advisor channel is critical to Vanguard. Thomas Rampulla, Vanguard's new head of its Financial Intermediaries group told me the advisor channel accounts for roughly $1.1 trillion of Vanguard's $3 trillion in assets. I suspect Vanguard would not want to damage that relationship.
So I suggest paying careful attention to Bill McNabb's message. The business of financial advice today is very different than it was a decade ago and there is every possibility that the pace of change will even increase. Those who adapt to change will succeed as demand for good advice will also likely increase. The future for financial advisors is bright.