Vanguard Wants to Turn Your Portfolio Adviser Into a Life Coach

(Bloomberg) -- Vanguard Group’s Greg Davis has a message for financial advisers about their clients: “You are their emotional ballast for the uncertain times.”

The chief investment officer of the $5 trillion asset manager stressed the growing importance of the softer side of financial advice at a recent event promoting exchange-traded funds. While these products are well-known as cheap investment tools, issuers like Vanguard are now promoting packages of their funds to advisers.

The move is a bid to gain more sway over which ETFs the advisers recommend to clients. The appeal for advisers, the providers say, is they can spend more time meeting a growing demand of their job -- coaching jittery clients through periods of uncertainty. The pitch? Use these prefabricated portfolio of funds we’ve put together instead of spending time selecting individual ETFs.

“It’s obviously freeing up tons of time to focus on clients,” said Jason Gladowsky, a principal and investment adviser for The Gladowsky Group in Smithtown, New York, who is increasingly using these portfolios. “It’s just something resonating with all of our clients at this point.”

Robo Threat

Financial advisers are having to adapt or perish as retail investors strike out on their own, or sign up with robo-advisers such as Wealthfront Inc. and Betterment LLC that automatically direct investments into funds. Assets at discount and online brokerages grew 25 percent in 2017 alone, according to a study from Aite Group.

To compete, advisers are increasingly emphasizing personal touch and seeking scale in the belief that managing more money can offset falling fees. That’s where so-called model portfolios come in.

Gladowsky used to buy these as fringe allocations for clients with relatively few assets, but he now uses them as principal investments for wealthy individuals as well. That gives him time to focus on clients’ wider financial health and help them with estate planning or tax management, for example.

Model Investments

These ready-to-go packages are designed to keep advisers within their provider’s funds, rather than having them pick and mix among the more than 2,000 ETFs currently trading in the U.S. While it’s unclear exactly how much is managed within these portfolios, there’s something for everyone, with some focused on stocks, some looking across asset classes, and others catered toward tax efficiency or factor overlays.

“You’re going to see more and more firms doing that, as well as innovative broker-dealers and banks creating their own models,” said Rich Powers, Vanguard’s head of ETF product management. “This idea that each adviser has alpha in selecting the best ETFs -- people are coming to recognize that it’s probably not the case.’’

These portfolios can be sold directly to advisers, or via intermediary channels like Betterment for Advisors or Adhesion Wealth Advisor Solutions. Issuers also pitch their funds to large banks and brokerages that construct their own model portfolios for clients.

The fund providers typically charge nothing or very little for their models, instead just collecting the fees baked into their ETFs, which in the U.S. range from 30 cents to $94 for every $1,000 invested. The platforms hosting fund models may separately demand a fee from advisers who want to use them.

Fee Pressures

Vanguard now has $15 billion of assets in its model portfolios, which it offers on platforms including BNY Mellon’s Lockwood Advisors. Funds from State Street Corp. and BlackRock Inc. are also on that platform, with models in the “early innings of a fast growing trend,” according to Eve Cout, a director in BlackRock’s U.S. wealth advisory channel.

But while inclusion in model portfolios boosts assets, which bring in revenue, the trend toward these packages is simultaneously intensifying the fee war and making it harder for the little guys to compete with the three biggest issuers.

State Street, for example, has slashed the price of 26 funds over the past two years, in part to make them more appealing building blocks for brokerages structuring models. This has given them an entry point to try to raise awareness about some of its more differentiated (and expensive) products, according to Rory Tobin, the global head of State Street’s SPDR ETF business.

“Without us having the low-cost funds we didn’t have a strong conversation,” Tobin said. “Now we’ve got access, we can talk about not just the low cost, but we can talk about other non-low cost portfolios and other capabilities we have.”

Friendly Trend

Of course it’ll take time for advisers to completely eschew stock, or ETF, picking, according to Brendan Powers, associate director of product development for Cerulli Associates, a research and consulting company. And while relatively calm markets make advisers more comfortable with generic portfolios, volatility tends to encourage a more hands-on approach.

But for Matt Forester, chief investment officer at BNY Mellon’s Lockwood Advisors, the rise of model portfolios has huge potential.

“Model portfolios are one of the most interesting trends in finance today because they’re combining a lot of things -- from adviser behavior to adviser time-management,” he said. “Models have begun to be adopted globally. This is a trend in the adviser community that I think has quite a bit of legs.”

To contact the reporters on this story: Sarah Ponczek in New York at sponczek2@bloomberg.net;Rachel Evans in New York at revans43@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Brendan Walsh

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