It's Vanguard vs. Fidelity in the robo-advice game

Two fund giants battling it out but you might be surprised at which firm might come out on top after all

Jun 19, 2015 @ 1:39 pm

By Bloomberg News

Barraged by investment firms eager to manage their life savings, many Americans are making their choice — for nobody. They're shrugging off investment advisers altogether in the hunt for lower costs.

So fund giants Vanguard Group and Fidelity Investments are trying to win them over — with robots. The rivals, which have a combined $5.4 trillion in assets under management, are escalating the competition for customers in a new frontier known as robo-investing. Robo-firms use algorithms to design portfolios based on questions clients answer online. These portfolios will more than triple to as much as $60 billion in 2015 from about $16 billion at the start of 2014, Boston researcher Aite Group predicts.

(More: Robo-advisers want to plan your clients' future)

Robo-startups Wealthfront and Betterment are sparking this latest race to the bottom in fees, a contest Vanguard kicked off with index funds 40 years ago. This time, companies are pitting machines against humans to reduce the cost of advice. “This is the new rivalry,” says Alois Pirker, a research director at Aite.

Vanguard has an ally in Palo Alto, Calif.–based Wealthfront. The company's algorithms direct about 90% of the average portfolio to Vanguard funds. The firms don't have a financial relationship, and they're chasing different markets. Yet their CEOs praise each other's strategies. “I'm a big fan of what's happened in the robo-world,” Vanguard CEO Bill McNabb says.

Vanguard unveiled its own robo-like offering in May, called Personal Advisor Services, for customers with at least $50,000. It targets retirees, or near retirees, compared with the millennials who flock to robo-startups. Vanguard's algorithm looks at age, risk tolerance, and other attributes it gleans from an online questionnaire. The client speaks with an adviser before finalizing the investment plan. Vanguard, located outside Philadelphia, charges a relatively puny 0.3% of assets annually on top of the fees for its funds. Traditional advisers can take 1% or more.

Fidelity is embracing the robo-product route via the 3,200 independent advisory firms for which it clears trades and holds about $1.5 trillion in assets. Boston-based Fidelity teamed up with No. 2 robo-firm Betterment in October to steer those advisers toward Betterment's software. The robo-programs pick portfolios, often based on Vanguard funds, and automatically rebalance them to cut time and costs. Fidelity gets a referral fee, which it won't disclose, from its New York–based partner. “Financial firms can no longer wait for the emerging affluent to appear at their doorstep when they have enough assets,” says David Canter, who heads a Fidelity unit serving independent advisers. “You have to think about them now.”

Fidelity, which built its business on funds that try to beat the market, says it doesn't currently plan a robo-product for retail investors. It already has funds that automatically rebalance and online tools to build a portfolio. Its advisory services cost from 0.55% to 1.7% depending on the amount of assets a customer has.

In the rising robo-rivalry between Fidelity and Vanguard, the winner may be ... Charles Schwab Corp. The largest independent U.S. brokerage by client assets started a robo-offering for retail investors on March 9. By the end of May, the new program had $2.4 billion in client money and about 33,000 accounts. “The pressure is on,” Aite's Mr. Pirker says.

0
Comments

What do you think?

View comments

Recommended for you

All of the noise in the District of Columbia is distracting your clients. Ben Phillips of Event Shares explains what deserves your attention (and what doesn't) as we head into 2018.

Recommended Video

Channels

Latest news & opinion

Independent broker-dealers are stepping up their game on recruiting from the wirehouses

Independent broker-dealers have narrowed the gap between themselves and the wirehouses and are able to attract more quality brokers from the Big Four.

Capital Group, sponsor of American Funds, wins 401(k) lawsuit

Decision comes as financial services companies, especially those focused on active management, have been sued for self-dealing.

SEC considers barring aggrieved investors from suing companies

Swept up by pro-business zeitgeist, regulator seeks to reverse two-decade slump in U.S. stock listings.

Wells Fargo, Morgan Stanley use contrary tactics to keep advisers

Wells is helping brokers transition to independence within the firm, while Morgan is taking them to court.

Fidelity pushes Vanguard to compete on brand in 401(k) plans

With Fidelity imposing an additional fee, Vanguard likely will look less attractive compared with comparably priced index-fund providers, advisers said.

X

Hi! Glad you're here and we hope you like all the great work we do here at arjuna-design. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting arjuna-design.com? It'll help us continue to serve you.

Yes, show me how to whitelist arjuna-design.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Last News

sei institutional international trust vanguard iowa 529 mo 529 plan columbia focused large cap growth is vanguard good for roth ira fha home equity conversion mortgage 1099 r code 2 vanguard commodity index eaton vance floating rate income trust goldman sachs short duration tax free fund american century value fund large cap vs small cap funds ishares core s&p total us stock market social security benefits for ex spouse after death financial advisor specializing in student loans what funds to invest in 401k equity income fund t rowe price primecap odyssey aggressive growth fund morningstar securities and exchange commission pay scale franklin templeton investment funds templeton global bond fund financial advisor specializing in student loans t rowe price international equity index legg mason value trust mutual fund wells fargo advantage core bond fund registering for medicare at age 65 franklin templeton emerging market debt opportunities fund vanguard international stock fund fidelity s&p 500 index wells fargo small cap value fund manning napier mutual funds vanguard s and p 500 mutual fund t rowe price tax free income rules for 401k withdrawal at age 55 top 50 mutual funds