US investment giant Vanguard aims to shake up the financial advice market with the launch of a cut-price service tomorrow.
Already known for low fees for its funds, which track markets rather than using skilled managers to pick investments, Vanguard will charge 0.79 per cent a year for financial advice – including the cost of the investment funds and platform fee.
The move could send shockwaves through an industry where the fees of fund managers and financial advisers often add up to more than double this.
Cut-price financial advice: US investment giant Vanguard will charge customers 0.79% a year
Traditional financial advisers charge an initial fee of 2.4 per cent, followed by 1.9 per cent a year in fund and advice costs on average, according to the Financial Conduct Authority.
Vanguard, the world’s second largest asset manager, could also grab billions of pounds in business from the estimated nine out of ten people who do not currently get any financial advice – often because they fear they can’t afford it.
Sean Hagerty, head of Vanguard Europe, says: ‘For many investors the cost of advice is a barrier – it is not uncommon to see total fund management and advice costs of more than 2 per cent.’
Vanguard’s service will not be as comprehensive as offered by independent financial advisers.
For example, its advice does not cover inheritance tax planning, property and other assets and insurance products.
It also does not enable savers to buy funds aside from its own.
For savers with complex finances, specific goals, or who want plenty of support, an independent financial adviser could still be the best solution. But for savers with straightforward finances, the Vanguard service could be ample.
For many, the cost of guidance is a barrier
Sean Hagerty of Vanguard Europe
The Pennsylvania-based company’s 0.79 per cent fee is made up of a 0.15 per cent administration levy plus an advice fee of 0.5 per cent, with fund charges from ‘passive’ tracker funds making up the rest.
This is not the first time Vanguard has thrown down the gauntlet to the financial industry with rock-bottom prices.
In 2017, it launched an online investment service costing just 0.15 per cent a year – considerably cheaper than the incumbents.
And last year it added a self-invested personal pension charging 0.15 per cent a year – capped at £375. By comparison, wealth manager Hargreaves Lansdown charges up to 0.45 per cent a year.
Vanguard hopes its new ‘personal financial planning’ service will appeal especially to people coming up to retirement and who want to turn savings into a secure income for their old age.
It will offer advice on how to achieve retirement targets by exploring a range of tax-efficient options. This will be particularly important for savers who risk breaching the pension saving lifetime allowance of £1,073,100.
Any money above this level taken as income incurs an extra 25 per cent charge and taken as a lump sum is taxed at 55 per cent.
Hagerty says: ‘We see the lifetime allowance as something that could become a factor for many people – and we aim to provide support so clients are able to consider other tax-efficient options, such as individual savings accounts.’
Initially the service will only be open to people with at least £50,000 to invest and this money will have to be put into Vanguard’s range of funds.
Those with savings of £50,000 to £100,000 will be offered a ‘digital financial planning experience’.
Initially the service will only be open to people with at least £50,000 to invest
After completing a detailed questionnaire on their financial situation and goals, they will receive online guidance, which will be reviewed annually.
They will also be able to talk through the details and their aims with an adviser over the phone.
Savers with more than £100,000 can have video-based conversations as well as accessing phone support.
Meanwhile those with more than £750,000 invested will get their own financial planner, who will also be able to offer face-to-face financial advice.
Hagerty says: ‘Financial advice will be offered by real people – not robots. But once advisers have discussed retirement targets with clients, they will use technology to help manage a portfolio.’
Advice will be offered by real people, not robots
Vanguard will use back office technology to set off alerts when it is time for a customer to move their money into different accounts or receive fresh advice.
These alerts will be triggered at points that customers have agreed in advance with advisers. They could include, for example, when a customer hits an investment goal, or needs to change the level of risk of their investments as they move closer to retirement.
Advice will not cover non-Vanguard-branded investments, though these could still be taken into account when coming up with a financial plan.
Vanguard offers more than 75 funds to choose from, which track indices such as the FTSE All-Share Index and the FTSE 100.
Hagerty says Vanguard is not trying to take money from independent financial advisers, as they play a vital role in the market.
Yet these advisers might still have plenty to fear – with Vanguard calculating that its low-cost model means an investor with a £250,000 lump sum could save more than £190,000 over 25 years if they pay 0.79 per cent a year in total charges for fund management and advice rather than 2.4 per cent of their investment upfront and 1.9 per cent a year thereafter. This is based on a projected return of 5 per cent a year.
Hagerty adds: ‘With potential savings of hundreds of thousands of pounds, you may ask yourself whether paying for expensive managed funds and financial advice offers value for money.’
Most independent financial advisers charge an annual fee calculated as a percentage of your investments, but some charge an hourly rate, generally about £150 an hour.
New player Bancroft Wealth offers financial advice for a competitive flat fee of £500 a year.
Jeremy Fawcett, founder of the consultancy Platforum, believes the new Vanguard service could steal customers from existing so-called robo-adviser services, such as Nutmeg, as well as DIY investment broker services that offer advice arms, such as Hargreaves Lansdown and Fidelity.
Nutmeg charges 0.99 per cent a year for managing funds, but requires a one-off £575 for ‘personalised planning and advice’.
Hargreaves Lansdown charges an initial 1 per cent for ‘investment advice’ on the first £1 million you have with it, with a minimum charge of £495 if you receive advice by phone.
Ongoing financial advice costs 0.365 per cent a year. The fees are separate from any fund charges.
Fidelity offers a ‘Wealth Management’ investment advice service charging 1 per cent of the amount to be managed and 0.5 per cent a year for a review. This levy is separate from any fund charges.
Would you trust cut price advice, or do you prefer a traditional financial adviser? Email [email protected]
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