After much market rumour and anticipation Vanguard have lifted the covers on their direct offering for the UK market. With The Sunday Times helpfully writing an advert for them over the weekend it certainly appeared that the launch was imminent, and finally the big day has arrived.
First reactions? It’s cheap. Seriously so. The account fee of 15bps, capped at £375 (more on that later) is way below every other platform bar fixed fee offerings for very large portfolios. By the time you add on the already low fees for Vanguard’s LifeStrategy funds or their ETFs the total cost of ownership blows every other planet out of the sky. It’s as if millions of fund managers suddenly cried out in terror, and were suddenly silenced.
If you are a Vanguard fan, and price sensitive, then you won’t need any convincing. You’ve probably already invested. However in the real world not many people are either, let alone both. Vanguard will no doubt be hoping the launch publicity will help build their profile, and of course costs (lack of) is a key component of this messaging. Their website explains this in some detail, but you can’t help but wonder if there is more to come. The magic power of compounding means the long term impact of a cheaper platform can be huge, both in charges paid out and actual returns gained. A more aggressive approach here could really help ram home the point about charges. Perhaps Vanguard are keeping their powder dry for another day.
I also wonder whether they have left a bit of wriggle room on the platform fee. 15bps, capped at £375 (more on that soon, promise) is cheap, but it’s not rock bottom. As disruptive as this pricing might be, there does seem to be room to become even cheaper if required.
So, what does this mean for the rest of the industry? Threat, or opportunity? For some it should be the latter. Evidence from the States shows that when Vanguard (and the other major houses, Charles Schwabs and Fidelity) launched the start-up ‘robos’ received a boost as they effectively surfed the wave of publicity. For most, this was a short lived boost, however for some there is a chance to differentiate their service from Vanguard offering. Deep down, this is just another fund manager launching a direct offering (albeit one with several trillion AUA) and whilst the product is currently performing well if you invest with them you are constrained to only using their funds. If something happens to these funds and they no longer are performing well, or your circumstances change, you and only you can do something about it. The service proposition that some robos, such as Scalable Capital, Nutmeg etc offer, whereby the portfolio is constantly monitored to stay aligned to your chosen risk level will for some investors remain a more attractive and suitable option. These firms will welcome the spotlight on the direct investing market, and will hope to attract new customers as a result.
Whilst this launch is aimed at the direct market, the threat could well be felt most in the advised space. Fundscape report that Vanguard were top for net sales on platforms in 2016, with LifeStrategy 60% the 5th best selling fund. The £375 price cap on the direct offering means that potentially a large number of clients will be better off in cost terms moving from their current advised platform to the new direct one. Obviously this is a sweeping statement, and there are limitations, most notably the lack of a SIPP wrapper, the constrained fund range and (ahem) the lack of adviser charge functionality, but if a client is happily invested in, say, LifeStrategy and nothing else, then the cost savings could be huge.
For example, for a £1m client the market average for advised platforms is 22bps (for ISA), therefore creating an annual platform charge of £2200. Or put it another way, an annual saving of £1825 if you transfer to Vanguard Direct. For 500k it’s a similar picture. Advised market average is 26bps, so an annual saving of £908 if you move. Vanguard might be aiming this launch at the direct investor, but the advised market can’t ignore it. Platforms with large books of Vanguard business will doubtless be keeping a close eye on net and gross flows over the coming months.
Overall this feels like a big moment, and almost certainly the biggest launch of the year. If this results in a shift of investor behaviour akin to the one taking place in the States, where Blackrock and Vanguard are eating everyone’s breakfast, lunch and dinner then this launch will be a pivotal moment. We’ll be watching closely to see what happens.
Oh, and once the FCA are out of purdah next month we are expecting the Asset Management Study final paper. Could be a good time to launch a low-cost investment offering…