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Advisers should celebrate the launch of Vanguard D2C

After equal measures of anticipation and fear, Vanguard has finally unveiled its D2C offer for the UK retail market.  Advisers should celebrate.  Sounds contradictory? Not at all.

What’s being offered
Firstly, a quick look at what is being offered.  Vanguard is offering direct access to its funds through with the option of holding them through an ISA or JISA, with a SIPP to follow.

Of most of interest (or rather for most ease), from a consumer perspective, will be the “do it for me” type of asset allocation funds that provide an entire portfolio management solution within a single fund. 

Specifically, the target risk funds, known as the Vanguard LifeStrategy funds, (with a fixed allocation to equity, e.g. 60% equity), and the target date funds, known as the Vanguard Target Retirement Funds (with a target date to match expected retirement date).

For these portfolio management funds, the OCF is, for example, 0.22% (the Vanguard LifeStrategy 60% Equity Fund).  Adding on some 0.15% administration fee for holdings below £250,000 and the all-in cost (“Total Cost of Ownership”) of 0.37% is highly compelling, when compared to existing DIY alternatives.

The right thing for the right segment
Vanguard going D2C poses no threat to advisers.  Here’s why:

  1. The target market is existing and first-time DIY investors who historically don’t get a good deal elsewhere
  2. Typical account sizes are likely to below the threshold that an adviser would consider taking on as a client
  3. Larger account sizes who want to go Vanguard DIY are DIY investors already
  4. Vanguard offers a convenient investment solution, through its asset allocation funds, not a financial planning solution
  5. Financial planning is the adviser alpha that considers wealth structure, inheritance & estate planning, tax optimisation and can advise on pension transfers.  Neither Vanguard nor any roboadviser can offer those things – which are as important or even more important than access to market returns.
  6. Relationships and trust are the one part of client service that cannot be commoditised.


So who should be worried?
Whilst having a multi-billion manager park its tanks on a well-mown English lawn definitely deserves a shiver of fear, that fear should not belong to advisers.

In my view, those that should be worried are:

1) Fund providers that can offer asset-class fund “components” but do not offer investment strategies delivered as funds.  The principle target of the FCA market study are the “closet indexers”, providing exposure to a particular market, but with questionable value for money.  Asset managers need to decide if they build components, run strategies or do both.  The most successful managers will do both, but to charge for the strategy, the components need to be low cost. Roll on ETFs.

2) DIY platform providers that can compete on value, but cannot differentiate themselves on service, brand or quality.  To a certain extent, platforms solve a problem – how can I access all the funds on the market, see all my holdings in one place, with ubiquitous online access? But it’s yesterday’s problem.  If the focus is on delivering managed asset allocation solutions, the DIY investor is struggling with how best to combine the thousands of funds on offer.  With asset allocation funds (target risk, or target date), the fund is the platform, and the fund has all the holdings in one place.

3) Roboadvisers that can offer a compelling interface, but offer generic investment strategies.  Both robo and Vanguard are offering ready made portfolios of ETFs.  The cost of delivering robo investment solutions via individual accounts will necessarily always exceed the cost of delivering investment solutions via a collectivised fund.  Besides, Vanguard has more firepower to spend on brand without need for impatient private equity backing.

Conclusion

Vanguard’s long-awaited UK launch is good for existing and first-time UK investors.  Its deflationary pressure is healthy for an industry that needs to think hard about what it offers.  Whilst some may be concerned, this is good news for advisers, and great news for the investors they can’t serve.
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