11/12/2014 - 14:03

The Vanguard of investment innovation

11/12/2014 - 14:03


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Until a few weeks ago, Australia’s 20,000 investment advisers and their associates in stock broking firms and banks probably thought they had jobs for life; but that was before the Commonwealth Bank advisers’ scandal and the latest threat – internet-powered advice.

The Vanguard of investment innovation

Until a few weeks ago, Australia’s 20,000 investment advisers and their associates in stock broking firms and banks probably thought they had jobs for life; but that was before the Commonwealth Bank of Australia advisers’ scandal and the latest threat – internet-powered advice.

At first glance, the idea of distributing personal advice through a computer connection might seem far-fetched, but that’s what is about to start in the US, with one of that country’s most successful fund managers effectively declaring war on its own team of consultants.

While still very much a US experiment in delivering investment advice, Australia has a habit of following developments in that country; with the added incentive this time for thousands of people affected by widespread problems in the Commonwealth Bank’s advisory network.

At least 1,100 Commonwealth Bank clients lost savings from bad or unethical advice, according to evidence presented to a Senate inquiry, so it’s a fair bet that they would welcome a shift from failed face-to-face advice to internet advice – as would the fastest growing sector of the investment world, self-managed superannuation funds.

Vanguard Group, which manages an astonishing $US3 trillion for its US clients and has a track record of innovation, is leading the latest groundbreaking change to the way the investment world functions.

Its success, which has led to the flow of $US185 billion into its funds since January, is largely thanks to a no-risk approach that tracks indices and follows mutual funds and exchange-traded products rather than trying to pick individual winners, a tricky game at the best of times.

Alongside its cautious approach have been very low fees of slightly less than the US industry average of 1 per cent peeled off the total of funds under management.

Most Vanguard products are sold through a vast network of loyal advisers, with an estimated 250,000 advisers signed up to market Vanguard products in the US.

That could be about to change, because Vanguard reckons it can do a better job for its customers by ‘speaking’ to them directly via the internet, offering online advice, investment tutorials and webinars of the sort which have become popular in a number of industries.

Bypassing the adviser network could, in theory, mean a drop in the annual fee charged on funds under management to around 0.3 per cent.

For a client with $US1 million managed by Vanguard and distributed across a range of funds, the saving could be as much as $US7,000 a year, with the annual fee cut from $US10,000 to $US3,000.

Vanguard chief executive Bill McNabb told London’s Financial Times newspaper earlier this week that the change to internet-based advice would start next year and, naturally, he was confident that it would succeed.

“Can we provide really super-high-quality advice at a very low cost and do that in a large way and change the market? I think we can,” Mr McNabb said.

“We think our primary mission is to reduce the complexity and cost of investing across the board.”

Stockbrokers, who once enjoyed fat fees from simply processing buy and sell orders know what can happen to a segment of the finance industry when it is deregulated and competition for business is permitted, with many brokers forced out of the industry over the past few years as fee income evaporated.

Investment advisers, who took some of the market share from stockbrokers, are now facing a similar existential challenge, because most of what they do involves lodging electronic forms on behalf of clients while providing cursory (and sometimes incorrect) advice, as the Commonwealth Bank situation revealed.

Vanguard’s attack will almost certainly test (and possibly destroy) its relationship with the US investment advice community.

Mr McNabb is ready for whatever the advisers might try with his appeal to the hip pocket of clients.

In effect, Vanguard is doing what many other industries have done – use the internet as a disruptive technology to build a direct relationship with its customers by eliminating the middle man.

If the switch works, Vanguard clients could soon be dealing with the manager of their funds through a variety of electronic connections, with one of those clients potentially the key to the systems success.

Warren Buffett, or more specifically his wife, could be a ‘Vanguard direct’ customer because the world’s best investor (and one of its richest people) has suggested in his will that, after his death, 90 per cent of his estate should go into a low-cost Vanguard fund.

You can’t get a better testimonial than that.



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