‘Vanguard effect’ will ripple through advice market

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Altus’ Janine Menasakanian knows Vanguard inside and out having worked there for seven years. Now at Altus she shares her views on the firm’s financial planning launch, which, she says, may not have all the bells and whistles you’d expect but is client-centric at heart…

This week we saw the launch of the long-awaited financial planning service from Vanguard. Offering advice to retail customers was on the cards since the introduction of the Personal Investing proposition in 2017, so it came as no surprise to anyone.

It follows the success of the Vanguard Investor Services in the US some years ago. The US proposition came at a time when robo-advice was all the rage and the talk of the town. Vanguard chose to buck the trend and launched a hybrid model, stating that having a human coach was important and, in some cases, a better option for retail clients.

Having worked at Vanguard for seven years, I can say with certainty that everything the firm does has retail clients’ interest at the heart of its decision making. Fast forward to 2021, and I am sure that Vanguard feels vindicated in its decision, because many more have followed their model and accepted that having some degree of human interaction/interface leads to better outcomes, especially when dealing with clients either approaching or at retirement.

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The new service is aimed at people approaching retirement. Investors with over £100,000 being given access to financial planners while those with smaller sums, above £50,000, will get a digital financial planning experience.

It is lauded as disruptive; the 0.79% fee includes an advice fee (0.50%), ongoing fund charges (0.12%), transaction costs (0.02%) and platform fee (0.15%, capped at a maximum of £375 a year) and of course because this is a service offered by Vanguard, there are no entry or exit charges.

Naturally, the advice is restricted to Vanguard funds but in all honesty that is no bad thing, you cannot really go wrong with the fund range on offer, though I must admit the sustainable investing options could be better.

Teething problems

So far so good, so what is there not to like? The user interface (UI)/ user experience (UX) is not great – disappointingly there is far too much friction.

Firstly, finding how to start the process was a mission! I could not find where to go when I was logged into my account and it was only when I was logged out that I could see the service promoted at the bottom of the webpage.

You are then asked to submit your interest, which generates a secure mail giving you access to the online questionnaire link. My heart sank when I saw that the process could take 45 minutes. Unfortunately, I could not get beyond the first six minutes because I failed at the first hurdle, I do not have three months’ expenditure as cash.

I wonder how many more will be gated in the same way and will simply give up rather than persevere by calling the support team.

In truth, when I was working on the Legal & General Investment Management digital advice offering in 2018, we came across the same issues during our pilot. Ultimately some of these challenges made us reconsider a wider launch and the project was aborted after the internal pilot, which was a great shame because L&G with their strong UK brand and comprehensive product range could have easily helped plug the advice gap.

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Notwithstanding some of the UI/UX issues, which I have no doubt Vanguard will work on fixing and improving, what does this launch mean to the UK financial services market? I’ve already said it is great news for retail investors who are set on ‘doing it themselves’ because they do not want to pay for financial advice.

I do not think that financial advisers or discretionary wealth managers (offering financial planning) have much to fear yet.

Some clients may be tempted to have a ‘look’, but the current experience will probably be too off-putting. How long will it be before these clients are lured back? After all, the cost is compelling, and it will not be long before we see the ‘Vanguard effect’ in the advice space.

We have certainly seen Vanguard’s entry in the UK push down the cost of investing. The only way any financial advice firm or indeed discretionary wealth firm can successfully compete with such low fees is through digitisation (as well as operational efficiency but that is another topic for another time), so if you are one of those firms reading this article and you have not yet acted, you need to act now.

In his white paper on digital advice, my colleague Sam Turner has explored the different options available to ensure success.

Compelling pension offering

What about the direct-to-consumer players? After all, there are many who are still operating below scale and unable to get traction. To succeed in the D2C space you need to have a compelling pension offering and facilitate pension consolidation through a simple and easy to use service.

If you need evidence, just look at the success PensionBee has had in such a short space of time and conversely the failure of Investec Wealth, which did not have a pension offering.

I have no doubt that Vanguard’s launch into financial advice soon after the SIPP, will accelerate pension consolidation on the Vanguard platform. Of course, there will be some customers who may want more investment choice and will not like to be restricted to Vanguard funds alone, but unless D2C platforms have a compelling offering at retirement, clients will move.

In the short term, I am most worried about large institutions, asset managers or life companies, either already operating in the retail space or looking to launch their D2C offering.

To compete effectively with Vanguard, they will need to think very carefully about their proposition, it is not just about cost but if you are more expensive as well as having a poor offering, the chances of success are stacked against you.

We will forgive Vanguard for poor UI/UX because the costs are so low and because we know that being a truly client-centric firm, they will listen and act on feedback to continually improve the offering.

The next few years will certainly be interesting. The need for advice is growing but there will no doubt be casualties and winners in the process. Those who win now have very tough competition and will need to raise the bar significantly.

Janine Menasakanian is investments consulting director at Altus

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