The big news in financial advice world last week was that many details of Vanguard’s new portfolio management service were revealed when InvestmentNews reported this Vanguard SEC filing. Here are a few key differences between the new Vanguard Digital Advisor Services (VDAS) and their existing hybrid VPAS offering:
- Vanguard Personal Advisor Services (VPAS) – Both human and online communications. $50,000 minimum. 0.30% annual advisory fee.
- Vanguard Digital Advisor Services (VDAS). Online-only communication. $5,000 minimum for retail accounts ($5 minimum for 401k). 0.15% annual advisory fee.
The 0.15% fee would make it cheaper than the digital-only offerings of the first-mover robo-advisors Wealthfront and Betterment. After reading through the entire SEC filing brochure, I noted some important similarities and differences between their services and even Vanguard Target Retirement funds.
VDAS will conduct your trades for you across all your enrolled accounts. (Eligible account types include: individual, joint accounts with rights of survivorship, traditional IRA, Roth IRA, 401(k), and Roth 401(k) accounts authorized by plan sponsors). If you have a Vanguard-managed 401k, you could then move your taxable and IRA balances over to Vanguard and have them manage everything together. Betterment and Wealthfront have a relatively tiny footprint in the 401k space. I suppose you could also just buy the same Target Retirement fund across all your accounts.
VDAS takes advantage of tax-efficient asset location, prioritizing tax-inefficient assets into IRAs and 401k plans. Wealthfront and Betterment will also do tax-efficient asset location, but again they are unlikely to manage your 401k so you’ll still have to do some work yourself. With an all-in-one Target Retirement fund, it’s the same everywhere and you can’t separate the stocks from the bonds.
VDAS will provide online financial planning tools where you enter your personal details to create a personalized, goal-based financial plan. Wealthfront, Betterment, and every other robo-advisor will do the same thing (using their own algorithms of course). However, a Target Retirement fund won’t do that, for example telling you if you’re picking an inappropriate target fund based on your unique financial situation.
VDAS will build your portfolio using only these four Vanguard ETFs: Vanguard Total Stock Market ETF, Vanguard Total International Stock Market ETF, Vanguard Total Bond Market Index ETF, and Vanguard Total International Bond Index ETF. (401k accounts will be more flexible, working within the available investment options.) Retail accounts will not include recommendations to purchase individual securities or bonds, CDs, options, derivatives, annuities, third-party mutual funds, closed-end funds, unit investment trusts, partnerships, or other non-Vanguard securities. When cash is recommended as part of the strategic asset allocation target (usually only for those close or in retirement), the Vanguard Prime Money Market Fund will be used.
That makes the basic ingredients of a VDAS portfolio the same as a Vanguard Target Retirement 20XX fund. It’s even possible that the asset allocation will be identical. However, it’s important to note for expense reasons (see below) that VDAS holds the cheapest ETF versions while the Target fund holds the most expensive Investor Shares.
VDAS is only about 0.05% more expensive than the equivalent Vanguard Retirement Fund. That amounts to $5 a year on $10,000 invested, or $50 a year on $100,000 invested. Why? DAS uses Vanguard’s cheaper ETF versions which results in an all-in fee (advisory + underlying expense ratios) of 0.20%. The all-in fee for the Vanguard Target Retirement fund currently varies from 0.15% to 0.12% because it holds the more expense Investor Shares of mutual funds. Vanguard has noted elsewhere that mutual funds are more expensive to maintain on their side, and so they charge more.
VDAS and VPAS both perform portfolio rebalancing within 5% bands. According to a previous article, VPAS checks your portfolio quarterly and then rebalances if a 5% threshold band is exceeded. According to this brochure, VDAS also rebalances only when an asset class (stocks, bonds, or cash) is off the target asset allocation by more than 5%. However, VDAS will check daily instead of quarterly. This isn’t a big deal to me, but an interesting difference to note. Rebalancing will be done in a tax-sensitive manner.
The Vanguard Target Retirement funds handle the rebalancing internally, and every other robo-advisor will have a similar rebalancing feature. Automated rebalancing is an important and sometime under-appreciated benefit of a managed portfolio over a DIY portfolio. Us DIY folks all think we’ll rebalance the same way without emotion, but sometimes… in times of stress… we don’t.
VDAS will only buy Vanguard ETFs, which means they won’t be doing any ETF tax-loss harvesting with similar pair of ETFs. (The legality of that practice has yet to be tested in court if its use becomes widespread.)
VDAS will not buy fractional shares of ETFs. A minor note, but an increasing number of brokers offer fractional shares, like M1 Finance. This can be helpful if you invest in smaller amounts, for example via dollar-cost-averaging with each paycheck.
Fee comparisons. The VDAS 0.15% advisory fee is very competitive. It’s cheaper than the base offerings of Betterment and Wealthfront of 0.25%. Schwab’s Intelligent Portfolios says it is “free” but from a cash drag perspective the effective fee is an estimated 0.12% (others estimate 0.20%). Betterment and Wealthfront have the head start in terms of technology and a modern design interface, but can Vanguard close the gap?
I was a bit surprised at how little VDAS costs more than a Vanguard Target Retirement fund. I have been a fan of Vanguard Target Retirement funds because they are basically a robo-advisor rolled into a simple mutual fund. However, in my opinion they should be cheaper. Is it possible for Vanguard to make them any cheaper by using ETFs or Admiral Shares? Do they want to? It seems that the answer to at least one of those questions is no.
As DIY person, I would remind folks that you can always buy the “Big Four” ETFs yourself at any low-cost broker: Vanguard Total Stock Market ETF, Vanguard Total International Stock Market ETF, Vanguard Total Bond Market Index ETF, and Vanguard Total International Bond Index ETF. It’s really not that hard if you are so inclined. A new broker M1 Finance offers free commissions, free rebalancing, and fractional shares. Now you have the same portfolio at an all-in cost of 0.05%.
Bottom line. Vanguard Digital Advisor Services is definitely going to make a dent in the robo-advisor field. The competition is far from over.