Vanguard to launch low-cost, personal advice for small investors

The CEO of the Vanguard Group, the low-cost mutual fund giant, said today that his company will soon be offering personalized investment advice and management for small investors—for less than a third of the typical cost.

F. William McNabb III, Vanguard's Chairman, President and CEO, told a crowd at Consumer Reports' headquarters today that the company is planning a new program, Personal Advisor Services, that would provide ongoing, one-on-one advice and portfolio management to its retail customers for 0.3 percent annually, or $3 for every $1,000 invested. Customers with as little as $100,000 in investments would be eligible. The company expects to roll out the service within 12 to 18 months.

"You should be willing to pay for advice, but not too much," McNabb said, adding that investors should not pay total fund and advisory fees of more than 1 or 1.25 percent. "We'll give the advice for 30 basis points, and we'll make it personalized."

An investor with under $250,000 in assets typically pays portfolio management fees of at least 100 basis points, or 1 percent, according to a 2013 survey of registered investment advisers by WealthManagement.com. Half of the surveyed advisers reported charging 1.1 percent and upward to those investors. Investment fees of all kinds are often cited as the principal culprit in reducing investors' returns.

The Vanguard program would include "comprehensive financial planning, ongoing portfolio management, access to financial advisors, and a highly personalized web experience," a Vanguard spokesperson told Consumer Reports. "Advisors will help clients identify their goals, develop a plan, and stay on track to achieve their financial goals." The service will be conducted via web, e-mail, phone, and videoconferencing. Vanguard is currently piloting the program with a pool of retail clients close to retirement age.

McNabb said he expected the typical 401(k) of the future also would include tailored advice for participants. But his company has no current plans to introduce the 30-basis-point advice model to the retirement plans it administers.

Vanguard offers different tiers of advice to retirement-plan participants depending on the service an employer chooses. For instance, participants may have free access to Financial Engines, an independent retirement planning tool. Vanguard currently provides no personalized portfolio advice for plan participants with assets below $500,000, but its annual management fee for assets between $500,000 and $1 million is 0.7 percent—lower than the industry average.

McNabb said he expects that in 10 years, auto-enrollment and auto-escalation—in which participants' contributions increase automatically over time—would be universal in 401(k)s. And, to address the difficulty many small investors face deciding where to put their money, choices would be simpler: 8 to 15 funds, with target-date funds at the core.

In that respect, Vanguard's own 401(k) is behind the curve, McNabb admitted. While his employees receive a dollar-for-dollar match on the first 4 percent of income contributed and an additional, 10-percent company contribution, they face a daunting choice of some 50 investments in their 401(k) plan. Many of those are legacy investments that McNabb said he would like to see removed, but that still have fans within the company. He joked that only right before he retired would he push to eliminate them—presumably to escape some employees' ire. —Tobie Stanger