In December 2015 in an article on Daily Fintech `From the Vanguard effect to the Robinhood & Blockchain effect` I wrote:
`Slashing fees is the action-reaction linked to the “Vanguard effect” in the ETF space. In stock trading, I pronounce “The Robinhood effect” as the complete elimination of fees on online investment management platforms`
Nearly 5 years later, Vanguard has $140billion assets under management in its hybrid Vanguard`s Personal Advisor Services and shyly introduced a low cost pure digital service- The Vanguard`s Digital Advisory. The cost is 15bps and if we include the ETF fees, it could go up to 20bps.
This is cheaper than the 30bps of Vanguard hybrid offering which starts with a human advisor and a minimum of $50,000. So, the new Vanguard Digital Advisor could entice customers starting with less than $100k that don’t need a person to start investing.
The other attractive feature of the Digital Advisor is that it offers clients the capability to include other accounts, towards their goal setting. For example, a 401k account from an employee managed elsewhere, can be aggregated on the Digital Advisor dashboard and taken into account, in order to determine the optimal asset allocation. This feature is similar to what Personal Capital offers to its clients (Personal Capital offers a hybrid service).
The new Vanguard Digital Advisor uses only 4 low cost Vanguard ETFs — Vanguard Total Stock Market ETF, Vanguard Total International Stock Market ETF, Vanguard Total Bond Market Index ETF, Vanguard Total International Bond Index ETF.
In Spring 2019, Schwab had undercut the fees in the hybrid advisory market with the $30 a month subscription service for retail.
The Schwab Intelligent Portfolios Premium was launched at $30 a month after a one-time $300 fee with a $25k minimum. Asset allocation is from a universe of 50+ ETFs, including a financial plan with a customized roadmap and unlimited one-to-one guidance from a CFP professional. Regulated financial-investment advice at $630 a year.
Schwab Intelligent Advisory (the original robo name) was at 28bps per annum of assets under management.
In Spring 2019, I was wondering whether Vanguard will follow with a comparable advisory subscription service. Did not happen yet.
In late 2015, I was actually expecting that some investment Fintechs (robo-advisors) would partner with Robinhood and challenge Vanguard with such low-cost services. It actually did not happen. I have come to realize that Robinhood`s API is one of the reasons that such partnerships have not happened and probably Robinhood does not want to grow in that way because there is no value to extract from such collaborations. If Robinhood were to partner with a digital investment platform, then they would not manage the cash account, margin etc of the client. The only long-standing partnership that Robinhood has is with Stock Twits, in which case Robinhood manages and milks the cash accounts of the customers.
In early October 2019, Schwab jumpstarted the Robinhood effect in the US market and several brokerage firms — TD Ameritrade, E*Trade, Interactive Brokers Group, slashed equity-trading commissions to zero. This forces all the players to find ways to make money. Some of them (e.g. Schwab) lend out the piles of cash that investors leave in their accounts and earn the spread to investors that are by now being used to earning close to nothing on their accounts. Others, make money on margin accounts and bid-ask spreads from equity trading.
We all know that this will not end up well. The market will have to consolidate and once rates rise, there will be blood on the streets with high profile bankruptcies.