Is Vanguard commoditising advice as well as products?
Vanguard's entry into the 'direct to consumer' market is another step in the commoditisation of core investment products.
Though it was always possible to buy core investment funds direct from a single provider, such as L&G's suite of index tracking funds, without incurring the charges levied by platforms or fund
supermarkets, Vanguard fund costs when bought direct are much lower. They are lower by more than the account charge that they (unlike other providers) are adding. This charge, of 15 basis points, is also capped at £375 pa. The combined costs, tracker plus account charge, will therefore be between 21 basis points pa (the cheapest) and 29 basis points (the average). Both will be lower if the total asset are above £250,000 because of the cap. This is a material new threat to both providers (L&G trackers are priced at around and platforms. For instance, both L&G trackers bought direct and Hargreaves Lansdown platform charges up to £250,000 exceed by at least 30 basis points the all-in Vanguard costs.
But the significance of this move, which is not unexpected given Vanguard's direct-to-consumer business in the US, is also that Vanguard are more attuned than most UK providers to the idea of designing products with specific personal goals in mind. The idea that core investment competence can be packaged as semi-customisable, goal-based and outcome-orientated and still enjoy the scale advantages that we associate with commoditisation is entirely realistic when you think like Vanguard.
A feature of purpose-designed products is that they ought to be expected to reduce or even eliminate the need for advice about how to use them. The integration of intelligence about the use of the product, including dynamic asset-allocation changes over the life of the product, is therefore also a threat to advisers. Whereas the initial reporting of Vanguard's pricing has focused on providers and platforms, commoditisation is also a threat to a standalone advice industry.
I'm not sure that Vanguard will be scared of providing regulated advice direct to UK consumers but the fact is they will not always need to. The point about purpose-designed products is that they may only need generic guidance at point of first sale, in addition to the product literature itself. Vanguard already produce this generic guidance for advisers many of whom rely on the Vanguard philosophy and generic literature to back up their own client communications. Vanguard is also likely to be effective at adopting technology-driven guidance or advice applications.
Providers like Vanguard will not be the only ones integrating products and advice about how to use them. Platforms can also load up on technology applications that remove the need for third-party advice. But expect also to see new entrants from within and outside the advice market offering interactive services based on personal goal planning. At their most ambitious, these can be designed to discover how the user visualises the benefits their money needs to deliver. Behind the scenes, logic can turn these into economic definitions of utility. Financial modelling and optimisation algorithms can work out how to maximise utility continuously subject to whatever constraints the user chooses. What the user will see is jargon-free action plans and progress reports that are relevant to the outcomes they said they value, in the form they defined and at the dates that fit their personal life stages.
These will necessarily be specific not just to a product or group of products but to a particular way of managing their use. The integration of the product and the advice is therefore material to its advantage, contrary to the conventional thinking that independent advice, unconnected with product providers, has the greatest value.