The Vanguard Group, a power in mutual and exchange-traded funds with $3.2 trillion in global assets, has written custom software that offers clients tailored investment advice, a new but crowded market for a company whose clients are largely self-directed. But while many roboadvisors act alone, Vanguard pairs them with humans, creating a hybrid model that marries algorithmic portfolio planning and relies on human financial advisors to provide a white-glove touch. The product, called Personal Advisor Services (PAS), launched last May.
Vanguard CIO John Marcante oversaw the project and describes the company’s mindset: “Could we leverage technology to enter what would be a pretty crowed [advice] market? Could we leverage technology in a way that provided massive scale that allowed us to be disruptive around price? And could we envision technology today to do this at scale with 20 million clients across our businesses?” The answers: Check, check and check.
Automated software such as PAS sets a precedent for a world where software and human collaborate in fields with specialized knowledge management. “Advances in automation technologies will mean that humans increasingly work side by side with robots, software agents, and other machines,” wrote Forrester Research analyst J.P. Gownder in an August 2015 report. He estimates that by 2019 automation will alter every job category by one quarter.
How roboadvisors and human collaborate
At Vanguard, humans are collaborating with software to help people plan their futures. When clients sign up to use PAS, human advisors meet with them, typically via a video conference or phone call, to create a financial plan. From any computing device, clients access the PAS Web portal where roboadvisors builds a custom plan for investments. When the client agrees to a plan, the roboadvisor begins executing it. “We were able to bring down the methodology for managing large portfolios and create fully automated investment advice,” says Marcante.
Vanguard’s financial simulation software, essentially a predictive analytics tool that runs 10,000 simulations in under than a second, forecasts future returns and generates a set of outcomes over many time horizons. The client monitors the performance of their assets as well as progress toward their goals; the human advisor reviews and rebalances their portfolio to keep them aligned with those goals.
While some software robots learn by inference, their improvisational capabilities remain limited. That’s where the humans come in. Marcante says the advisor also helps clients
avoid making trading errors during emotional times and volatile markets, often “talking them off the ledge when the markets are down and they’re supposed to be holding long-term.” Advisors also manage expectations and provide emotional support for anything from a sick parent or a lost job, all things for which algorithms lack finesse — for today, anyway.
Agile methodology gets down to goals
Marcante’s IT team built PAS over the last few years in small chunks using the agile development method, with which Vanguard builds 90 percent of its software. The chief challenge in creating PAS was one of scale, Marcante says. For each client, Vanguard must support separate portfolios aligned to specific goals, including anything from growing the family and home buying to college savings and retirement planning. “The biggest challenge for us was to take what we do at massive portfolios and bring it down to the goal level,” Marcante says.
PAS’ price point is also appealing, and, according to a case study from Forrester Research analyst Bill Doyle, quite disruptive. Most wealth managers charge a fee of 1 percent of assets under management and often require a minimum of $500,000 to $1 million in assets to invest. PAS costs roughly .30 percent of a client’s managed assets and requires a minimum investment of $50,000. “By connecting our proprietary financial engine with the power of people, we’re able to deliver massive scale at a very disruptive price, and give clients that piece of mind that comes with a human touch.” PAS has generated $31 billion assets for thousands of clients to date.
Vanguard is joined by Charles Schwab, Wealthfront and in the nascent but rapidly growing roboadvisor market, which will get larger as Fidelity, Wells Fargo Advisors, Morgan Stanley and Bank of America introduce competing products. According to Gartner analyst Chuck Thomas, roboadvisors have collected between $12 billion and $200 billion in assets under management through 2015. He forecasts that via roboadvisors that number will grow to somewhere between $255 billion in 2020 and $7 trillion in 2025.