Vanguard's financial advice revolution
Vanguard’s financial-planning product is transparent, cheap and low-hassle. The competition had better watch out
Jack Bogle, the late founder of giant asset manager Vanguard, made a huge difference to the finances of private investors across the world by popularising the use of index funds. These offer a cheap way to copy the return on an underlying stock index and in the process, beat most active managers over the long run. Bogle showed investors that if you could get the average return at a below-average cost, you would enjoy better returns with less stress than someone who chased complex but costly strategies instead. In other words, focus on the thing you can control (the price of investing) rather than the one that you can’t (attempts to beat the market).
Now Vanguard is applying that ruthless focus on cost control to basic financial advice. And the result, as Holly Mackay of Boring Money puts it, is “genuinely disruptive, in a positive sense”. The Vanguard Personal Financial Planning service is open to investors with at least £50,000 to save for retirement via Vanguard’s platform (see below). You answer an online questionnaire about your finances, retirement goals, and your risk appetite, and Vanguard puts your money into a diversified portfolio of its own tracker funds. It then takes care of regular rebalancing and ensuring you’re using your annual tax allowances efficiently. If you have over £100,000, you get access to a team of financial planners. Those with upwards of £750,000 will have a dedicated financial planner.
What does it cost? Just 0.79% a year, all-in (so fund fees, trading costs, etc). That’s excellent value. A traditional adviser would charge fees plus fund charges on top. In all, you could easily pay twice the Vanguard fee or even more. Note that Vanguard only advises on retirement savings, and only offers its own products (it’s a restricted adviser, in the jargon). It won’t talk to you about life insurance and other aspects of financial planning and for the moment only works with individuals rather than couples. But most advisers these days will invest your money in a portfolio that looks very similar to the Vanguard one in any case. As for other aspects of planning – you can always pay a specialist for specific advice as and when your finances become more complicated.
You could certainly run a diversified portfolio of basic tracker funds by yourself. But if you are looking for a low-hassle, low-cost way to have someone run a diversified, straightforward core portfolio for you, and take care of all the paperwork, rebalancing, and ensuring that you’re investing in a tax-efficient manner, then this seems an ideal solution to us. And if you already use an adviser, this news from Vanguard should encourage you to take a good long look at what they’re doing for you, and whether they can really justify their fees.
I wish I knew what a platform was, but I’m too embarrassed to ask
If you’re new to investing then you may find some of the jargon around financial services companies a little confusing. An “investment platform” is simply a company that allows you to buy and sell investments and hold them in one place. The term is used interchangeably with other terms such as “fund supermarket” and, depending on context, even more specific terms such as “stockbroker”.
Investment platforms are “execution only”. All this means is that they don’t advise you on what to buy or sell –you make the decisions and the platform “executes” them. That said, platforms mostly come with plenty of news services and analysis tools that can help you to research investments, while some also offer “best buy” lists of funds that pass certain selection criteria, although these have attracted controversy due to a lack of clarity on the precise conditions for being included.
When you’re choosing which platform might suit you best, there are several factors to consider. Cost is a vitally important one. Both the scale and structure of costs varies from platform to platform so can be tricky to compare without a good understanding of your own investment habits. The cheapest platform for a frequent trader of individual stocks will more than likely be very different from the best option for someone with a portfolio of tracker funds that they rarely touch beyond an annual rebalancing.
Cost matters, but it isn’t the only important factor to take into consideration. The range of products differs from platform to platform. So it helps to have a good idea of what you want to invest in and check the range of options on offer, particularly if you want to buy anything a little more exotic, such as individual shares listed on overseas exchanges or slightly more obscure funds. Also, look at reviews on customer service and accessibility – some platforms are more user-friendly than others.