Despite the pressure that his company has exerted on the financial advice industry, Vanguard CEO Tim Buckley believes that the future is human.
That's the takeaway from a wide-ranging interview between Buckley and Barron’s Reshma Kapadia. Buckley, who took the helm of Vanguard in January 2018 after serving as the company's Chief Investment Officer, believes that, while fee pressures will continue to squeeze the margins of investment products, technology will not replace humans.
That's good news for advisors who worry about the commodification of the investment products that were formerly their bread and butter. Technological change has been nibbling at the margins of the advisory business for some time. However, Buckely is emphatic that the long term effects will be positive: “advice will be higher quality; the ease of using it will be far better and the cost far lower.”
You Say You Want a Revolution
Buckley was careful to highlight that the value that machines can provide has a limit, but ultimately helps advisors. "So many of the things that were arduous, and where an advisor would spend 40% to 50% of her time—like figuring out a risk profile, rebalancing, tax-loss harvesting – can be automated and done so cheaply with technology."
As a result of that saved time, advisors will be free to spend more time getting to better know their clients, working with them on financial planning topics or helping them to temper their reactions to sudden market events. “Technology will have a hard time helping someone decide which charities to support and how, and a tough time estate planning for someone who wants to support one child who wants to be a scientist, and another who wants to start a business.”
Vanguard has invested in the advice game as well. The company complimented its passive investment funds with a personalized suite of financial advice. Vanguard Personal Advisor Services (PAS) offers a full suite of personal financial advice for investors with $50,000 to invest. As of January 2018, the service was the largest provider of roboadvice globally, according to the Financial Times.
Fees Falling Fast
Despite some recent sniping by competitors, Vanguard has long led the drive towards lower fees. Founded by John (Jack) Bogle in 1974, the company's flagship product, the Vanguard 500, helped drive the popularity of index investing for retail customers. The company scaled its index fund business into ETFs and is now the second-largest asset manager by AUM.
Even when it comes to active investing, where Vanguard still manages $1 trillion in assets, Buckley was quick to press for lower investment management costs: “Look across our funds and you will find they outperform their asset-weighted benchmarks by 80 to 120 basis points over a 10- or 15-year period. But if we put an industry average expense on them, all that alpha would disappear.”
Complementing that, however, Vanguard has doubled down on its advice model. Whereas the company had some hiccups in servicing in 2016 due to its rapid growth, it’s increased investments on the service side and will continue to pour assets into its advice model. When it comes to the next downturn, Buckley doesn’t hesitate: “We rely on making sure clients are well-educated ahead of downturn and stay disciplined. Our client behavior has been impressive. In the volatility in February, those who transacted were net buyers.”
While Vanguard leads the low-fee pack, competitors will continue to nip at its heels. Despite this, Buckley seems convinced that his approach will prevail. “We have to keep investing in our digital experience and keep driving costs lower.”