Vanguard, the U.S. asset manager whose late founder the legendary investor John ‘Jack’ Bogle is credited with making cheap index-tracking funds available to retail investors, is to start offering a low-cost financial advice service focused on retirement planning. The company has been ramping up its presence in the UK market in recent years and will now seek to take a major slice of the country’s market for financial advice.
The new low-cost financial advice service will target investors with at least £50,000 in assets, charging an annual flat fee of 0.79% to make use of its advisory service. Similar services currently available on the market can cost up to 2% of the value of a portfolio every year, significantly eating into returns. Vanguard’s competitively priced alternative can be expected to lead to rivals also reducing costs, to the ultimate benefit of retail investors in the UK.
Pennsylvania-based Vanguard was founded by Mr Bogle in 1975 and manages around $6.2 trillion in assets, which makes it one of the world’s biggest fund managers. The company is credited with pioneering passive investment funds – index trackers that come with a fraction of the costs of actively managed funds, despite outperforming fund managers for most of the past 20 years.
Passive investment strategies have surged in popularity in recent years. The bull market in place for most of the past 12 years has seen a large majority of actively managed funds notoriously fail to outperform their benchmark indices, convincing many investors that it is not worth paying their higher fees. The trend has had a major influence on the global asset management industry, and financial markets themselves, in recent years.
Advocates of index-tracking funds, which are designed to closely mimic the fortunes of benchmark indices like the FTSE 100 or Nasdaq, praise them for cutting down costs for retail investors while outperforming most actively managed alternatives.
Critics say the growing influence of passive investing is eroding the meritocracy at the heart of stock markets because companies benefit from demand for their shares by virtue of being included in a major index. Even if the company is performing poorly, its share price is propped up by default demand from the trillions of dollars tracking indices. There is an argument that helps reinforce the status quo, reducing natural competition for investor capital.
Vanguard already runs a low-cost financial advice service in its domestic U.S. market and has been consistently building up its presence in the UK over recent years. It launched a direct-to-consumer investment platform in the UK four years ago, which has attracted around 250,000 clients. It started to offer advice to SIPP holders last year.
Sean Hagerty, who heads up Vanguard’s business in Europe called the new service a “natural evolution” for the company in the UK. The company sees an opportunity in current financial advice costs in Britain, which it thinks put many consumers off receiving the guidance they need. FCA research published last year showed only around 8% of adults in the UK had received any professional financial advice. He commented:
“We think in the UK if you’re paying 1.5% to 2% you have to overcome a barrier to actually reach your retirement goal. We’re going to try and eliminate that barrier as much as possible.”
The 0.79% charge will be fully inclusive with no additional fees nor entry or exit charges. Vanguard estimates that for an investor with £250,000 in starting capital earning an average 5% return over 30 years, the difference between 0.79% and 2% will add up to a £275,571 difference in the value of the portfolio at the end of the period.
Under the new service, clients with at least £50,000 in assets will receive a personal financial plan. At over £100,000 access to a team of financial planners will be given and investors with portfolio’s worth over £750,000 will be assigned a dedicated personal financial planner.
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