Hey everyone, it’s Finance Fridays again. Today is going to be a short post about “Vanguard VPAS or VDAS”.
Vanguard VPAS or VDAS?
To clarify, we’re going to talk about Vanguard and their version of a financial advisor and Roboadvisor. I’ve talked about Roboadvisors and Vanguard’s financial advisor service called Vanguard Personal Advisor Services (VPAS) in my previous post – Roboadvisors.
The long and short of it is that Roboadvisors are fine if you want to “set it and forget it”. They do a decent job of giving you what you want with some marginal benefits like Tax Loss Harvesting and Direct Indexing. However, since that post, both Betterment and Wealthfront have changed their pricing structures, which I will now outline here:
Betterment
It looks like they simplified their plans to:
0.25% — their “basic” plan
0.40% — premium plan adds “advice” and access to a CFP Financial Advisor
Note that in order to do the 0.40% plan, your minimum invested is $100k.
Wealthfront
It seems Wealthfront has also simplified their plans to just:
0.25% annually
Interesting…
Vanguard has offered its Vanguard Personal Advisor Services (VPAS) for awhile now. It sits at 0.30%. This is a very much in line with the other Roboadvisors, but their service provides access to a financial advisor. This makes it more similar to the “premium” plan of Betterment which is 0.40%. Additionally, it’s “minimum” is $50k, which is less than Betterment’s $100k.
Well, since Vanguard prides itself on being the least expensive option, the expected is happening. Vanguard plans to provide its own version of a Roboadvisor, the Vanguard Digital Advisor Services (VDAS).
Currently, it’s only in a pilot. However, if you’re interested in, go ahead and read the SEC Filing. I will highlight some important excerpts from the filing below.
From the SEC Filing
In particular, Digital Advisor will recommend varying combinations of Vanguard Total Stock Market ETF, Vanguard Total International Stock Market ETF, Vanguard Total Bond Market Index ETF, and Vanguard Total International Bond Index ETF (collectively referred to as the “Four Totals”) to RIG Clients.
Digital Advisor targets an annual net advisory fee of 0.15% across your Portfolio although actual expenses will vary based on the specific holdings in your Portfolio and the net advisory fee you pay may also vary by enrolled account.
The ongoing advised service offered by Digital Advisor is made available to RIG Clients and RIG prospects with a minimum of $3,000 of investable cash alternatives (i.e., Vanguard money market funds, including the settlement fund and any Vanguard money market funds held as positions) in each enrolled account.
First, we will gather information about your risk/reward preferences or risk tolerance (also referred to as risk attitude or profile). Risk tolerance is derived from a User’s decisions within an assessment tool on the DA Website and Interface: TrueProfile Solutions®, provided by Capital Preferences Ltd. This assessment provides Users six hypothetical risk/reward scenarios that is designed to measure a User’s 15 inherent preference for risk by evaluating the tradeoffs in those decisions.
The objective of this “asset location” approach is to hold relatively tax-efficient investments, such as broad-market stock index products, in taxable accounts while keeping relatively tax-inefficient investments, such as taxable bonds, in tax-advantaged accounts.
Continuing on…
Under normal market circumstances, if any asset class (stocks, bonds, or cash) is off the target asset allocation by more than 5%, the Portfolio will be rebalanced to its target allocations (asset and sub-asset) or, in the future, within allowable guardrails pending embedded tax cost.
We will attempt to minimize the tax costs associated with rebalancing your Portfolio. If the Portfolio consists of both taxable and tax-advantaged account registrations, we’ll first attempt to rebalance within the tax-advantaged accounts to attempt to limit tax costs. In addition, we’ll follow a tax-efficient “asset location” strategy to consider the tax implications of repositioning investments within the taxable accounts and among the taxable and tax-advantaged accounts.
In assisting you with projecting your potential success of accumulating a sufficient amount of savings in order to meet your projected expenses in retirement, Digital Advisor will ask you about 1) your annual contribution amounts, 2) your projected retirement income or spending needs, and 3) an age range when you plan to retire (“Retirement Accumulation Inputs”).
Ok, ok ok, what’s this all mean?
VDAS will use only Total Stock, Total International Stock, Total Bond, and Total International Bond ETFs.
This is good, that’s all you should really use anyways in an index portfolio. The “bad” is you could just buy these yourselves without paying a fee.
0.15% annual fee
As expected, Vanguard is undercutting the competition, Wealthfront and Betterment which are both at 0.25%. Expected.
Minimum of $3000 invested to use VDAS.
This is significantly lower than the $50000 for VPAS. However, Wealthfront requires $500 and Betterment has no minimum (for their basic plan).
That said, this doesn’t really make a huge difference. The majority of people who will be using Roboadvisors will probably make this $3000 minimum.
Risk Tolerance Profile
This is kind of nice. It helps the user to understand where their risk tolerance is. I’d have to see how it actually works, but I imagine it’s just questions that categorize you into 1 of 6 categories from Conservative to Aggressive. If you don’t know where you lie on the Risk Tolerance spectrum, this little tool may be helpful for you.
Tax Efficient Allocation
Put Tax-Efficient stuff in Taxable Accounts
Put Tax-Inefficient stuff in Tax-Advantaged Accounts
This doesn’t seem important on the surface, but this may help you if your 401k is also managed by Vanguard. This gives them access to your 401k and all other accounts so they have a broad overview of all your money. This allows for the easiest “set it and forget it” there is.
Automatic Rebalancing
This is interesting. VDAS looks at your portfolio everyday and evaluates whether there has been a shift of >5% in regards to your target allocation. If there has been, it rebalances. I’m not sure where this 5% number exactly comes from, but I don’t necessarily see any problems with it.
This is helpful for people who are too lazy to rebalance their portfolios every year. I actually like rebalancing my portfolio every year just so I am forced to look at where things are. However, other people just don’t want to deal with it — set it and forget it.
Tax Efficiency during Rebalancing
If you have multiple accounts, it will try to first rebalance within tax-advantaged accounts to limit tax costs.
Retirement Planner
This is just another little tool to make sure you are on the right path to the retirement you want. Based on the data you input, I imagine it will let you know of the probabilities you will get to your goal or not.
So what’s your take?
Vanguard is a juggernaut. It has a ton of brand loyalty and creating the VDAS will just help it keep more people in the Vanguard ecosystem. On the surface, everything seems great. It offers a lower rate, reasonable minimum, the stocks/bonds you want anyways, tax efficiency, and rebalancing. Offering the other stuff like Risk Tolerance Profile and Retirement Planner is just icing on the cake. I can’t think of a better way to do things as a RoboAdvisor, aside from not necessarily offering Tax Loss Harvesting or Direct Indexing (currently).
My concern lies in the fact that so far Vanguard hasn’t been great in terms of User Interface and User Experience (UI/UX). Let’s be brutally honest and say their UI/UX for their website was and still is pretty bad when you compare to other offerings. I’ve had friends who use Fidelity because they like their UI/UX much better and just buy Vanguard stocks on their Fidelity accounts.
So here’s the bottom line.
The concept is a winner no matter what. The question is “how much of a winner?” Vanguard will at least continue to keep everyone in their ecosystem and do very well.
However, if they want to start winning people over from Betterment, Wealthfront, and others, they will need to make sure the UI/UX is clean and easy. This might be a good time to refresh their website in conjunction with offering VDAS. Their app isn’t bad, but I think is kind of limited it what can be done — although I haven’t used it lately. If Vanguard can bring their website and app UI/UX to the next level, it will truly change the game.
After that, where is the floor? It seems Betterment and Wealthfront have decided their “floor” is 0.25%. However, Vanguard says “our floor” is 0.15%. Will we begin to see lower after this? Only time will tell.
TL;DR
Just me talking about Roboadvisors and Vanguard’s new VDAS offering.
VDAS will be successful, no doubt about it.
However, if it wants to truly change the game, it needs to get its UI/UX game up to par with say… Apple maybe.
After this… where’s the floor?
-Sensei
Agree? Disagree? Questions, Comments and Suggestions are welcome.
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