Tech to the fore in Vanguard's new UK online investment platform

Vanguard, one of the world’s biggest passive asset managers which attracted $315 billion from investors last year, is launching a new direct to consumer (D2C) online platform in the U.K. that harnesses technology to offer lower fees to retail investors.

The new launch is likely to add to the pressure on active fund managers and brokers, which typically charge more but historically claim a better stock market performance.

Passive, as opposed to active funds, have lower staff costs so can undercut them on price. They also tend to have better automation technology, robo-advisor capabilities and lower running costs. This is putting the squeeze on traditional retail asset managers and brokers, especially when comparisons are made between respective returns.

The U.K. Financial Conduct Authority (FCA) recently published its asset management market study that found “price competition is weak in a number of areas of the industry” and called for a competition enquiry.

Vanguard will charge an administration fee of 0.15 per cent on its new D2C platform, in addition to underlying on-going fund charges that average 0.14 per cent. A £500 lump sum will be needed to open an account or a minimum monthly contribution of £100. Account fees will be waived after the first £250,000 ($322,633) invested, so the maximum account fee payable is £375 per year.

In comparison, the UK’s biggest retail broker Hargreaves Lansdown, which has £60 billion of assets under administration which is based in Bristol, charges its users 0.45 per cent of invested wealth for a tax-efficient Individual Savings Account (ISA) option, plus the fees charged to investors by the fund managers.

Vanguard’s D2C U.K. online service will offer a range of index funds, ETFs, Target Retirement funds and other options, alongside a standard managed ISA, junior ISA or general account. A Self-Invested Personal Pension (SIPP) fund is promised at a later date.

The new Vanguardinvestor service in the U.K. is designed to make investing simple and easy. Users can open accounts and manage their investments at any time using smartphones, tablets or any other connected devices.

Robo-advisors
The asset management sector as a whole faces a challenge from the growth of robo-advisors. This is an online, automated portfolio management service that uses artificial intelligence (AI) and computer algorithms to manage client investments at a fraction of the cost of a human financial advisor.

At present U.K. regulations mandate some element of human direction so ‘pure play’ and totally mechanized services are not allowed, as they are in the U.S., but regulations can change.

The Vanguard’s Personal Advisor Services robo-offering, unveiled in the U.S. in May 2015, is a hybrid. This makes it suitable for U.K. adaptation because the ISA and general funds are within an actively managed environment. The available options are within the parameter of its own funds.

The U.S. service is open to anyone who has at least $50,000 (£40,000) to invest and has an annual flat fee of 0.3 per cent of the assets under management.

The lower running costs of robo-advisors – whether pure play or not – can translate into higher net returns for investors, especially when combined with features like automatic portfolio rebalancing and tax-loss harvesting.

This technology-led disruption to the marketplace is a growing feature of the asset management industry, particularly on the retail side where the lower fees are attractive for many end users.

In the U.K. the rise of financial technology (fintech) enabled start-up robo-advisors such as Nutmeg and Wealthify, based in Cardiff, is a feature of the marketplace. Incumbents are of course responding to the challenge and looking to develop their own technology offerings.

In the U.S. Charles Swab has a pure play robo-advisor offering and other options with differing elements of human involvement or not are available. Regulation necessarily plays a role in what can be offered in any particular nation in the world, but the growing power of AI-inspired machine learning techniques to study the markets and to offer automated customer self-service mean that the technology driver for this disruption will only strengthen.

Sean Hagerty, Head of Vanguard’s European business, said in a statement accompanying the launch of its new U.K. online investment service, that the FCA interim asset management market study stressed asset managers’ obligation to act in the best interests of investors, “including requiring the industry to show how it delivers value for money”.

He believes new technology can help deliver this value for money and added that he agrees with the FCA conclusion that “fees have not decreased enough based on the economies-of-scale achieved by the industry.”

Fees in the U.K. asset management sector, and elsewhere in the world, will come under pressure in future years from regulatory initiatives such as this and the technology-driven disruption from robo-advisors.

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