One commentator heralded it as “throwing down the gauntlet to high-charging rivals and financial advisers by slashing fees to less than half the UK average”. Since the announcement, I have been asked about little else.
While Vanguard’s claim may well be true, the offer in itself is perhaps less attractive than the firm’s perpetually energetic marketing may suggest. It also leaves unanswered many key fundamental questions about platforms as a whole, as well as end-user costs for clients.
While Vanguard denies it is replacing the role of the adviser, as it is embarks upon B2C as just one of its service offerings, the firm’s actions suggest an intention to gather AUM from every channel possible.
Perhaps advisers shouldn’t be threatened by this. If a wider choice of private banks, life wrappers, stockbrokers and investment platforms is made available to clients, then the costs for commoditised services such as custody and dealing should all become increasingly competitive.
Lower third-party operating costs delivered across an increasingly complex and uneven playing field should create further justification for clients to seek professional, impartial advice.
There is also a question as to whether an online platform or brokerage account is most suited to the client’s needs anyway. I’ve read about how digital platforms are the way forward for investment and how advisers will suffer the same fate as high-street travel agents or video shops, but while I’d enthusiastically look for the technology to develop apace, I would add some important caveats.
Finding the level
First, investing is not as simple as booking a holiday online. People need different levels of advice, which in my experience can be placed into three categories.
DIY clients typically make all the decisions themselves. They may pay fees for specific expertise in related areas and also pay subscriptions or fees for research. Many might also want to execute transactions themselves online, while some may prefer to use a broker or adviser.
Collaborators want to be involved in the decision-making process but tend to place a higher value on external input. Collaborators might generally be less inclined to execute transactions themselves online.
Delegators are generally investors who prefer to have a high-level overview of the setting of strategy but little or no ongoing day-to-day involvement.
The best approach is very much the client’s decision and can change over time. However, each client’s required level of service is unique and this necessitates the tailoring of both service and fee packages, even as the complexity of intermediation and disintermediation relationships appears to be changing faster today as the role of technology increases.
To compound this, investors face unnecessary added challenges in trying to identify the unique, most cost-effective solution best suited to their needs at a given time.
This is because, in too many cases, financial services have become expert at ensuring that visible fees are just the tip of the iceberg. The majority of financial institution profit may lurk below the surface with multiple income streams. These are mainly: their own (or affiliated) product or service fees, transaction fees and profits and incomes received from third parties
Each of these have visible and hidden facets. Broadly, the essential links in an investment service chain comprise of the custody of the assets, the transaction of assets and the asset allocation/selection decision-making process. Investors, or their delegated agents, have to choose what assets to hold, buy and sell, etc.
Visible transaction fees might amount to only a fraction of a percent or a flat fee per trade, hidden or implicit income can be much higher.
As well as using third-party providers, institutions frequently promote the funds of their affiliated fund management company, thus capturing, for their parent company or group, the upfront and ongoing fees.
There has also been a growing trend for private banks to promote structured and other products created by their investment banking division.
Structured products typically have explicit fees that have averaged around 2% in highly regulated markets – and may be much higher in less regulated ones. They also generate further fees for the investment banks involved in structuring them, which can be many times greater still.
Most online platforms offer a far more limited choice than genuinely open architecture. Brokerage accounts have traditionally focused primarily on market-traded assets such as stocks, ETFs and mutual funds (although many brokers have also promoted structured products, too). Even within market-traded assets, there can also be additional opaque opportunities for banks and brokerages to generate significant extra income at the client’s expense.
Investors today are faced with an unprecedented dilemma: how to achieve the best solutions at the best prices when so much on offer seems to be opaque or incomprehensible. This becomes more difficult still when we hear so much about vested interests that were never declared ex ante.
Lighting the way
Vanguard’s marketing department seems to be responding to the same needs that led to a groundswell of support for passage of the Fiduciary Rule in America, and once again our profession covered itself in shame in its narrow-focused opposition to this. In doing so, of course, the company is promoting its own interests.
I welcome Vanguard is shining a bright light on the issue of fees through its actions. If your source of revenue is the fee paid by the client you can analyse every available type of structure, product or service and simply recommend the one that best suits the investor. Sometimes it may be Vanguard; in most cases it isn’t.
That is the beauty of fee-based impartiality: we only consider the investor’s best interests because the advice we give has no bearing on our own revenue streams.