Vanguard's hybrid robo-advisor creates Amazon-like fear among competitors; Bogleheads say robo can be great training

Vanguard's hybrid robo-adviser, called Vanguard Personal Advisor Services, oversees $106 billion as of first quarter 2018 after surpassing the $100 billion mark last year.

We asked financial analysts, Vanguard competitors, and Bogleheads — fans of Vanguard founder John Bogle — for their thoughts about the Vanguard Personal Advisor Services (PAS). Many of them use it — or have used PAS — since its launch in 2015. Retail investors especially like PAS's price – up to 0.3 percent a year for a robo-advised portfolio, plus a human on the phone when needed. The fee drops to 0.05 percent annually if you invest over $25 million.

Could that price one day drop even more? Vanguard has "no plans" to do so, said spokeswoman Emily Farrell. But the threat of lower fees looms over all of Wall Street.

"As I warned years ago when it first launched, Vanguard's human adviser service is the most disruptive event of the decade in wealth management. Not robos," said Virginia-based financial planning analyst Michael Kitces on Twitter.

Eric Balchanus, senior ETF analyst at Bloomberg Intelligence, said the "Vanguarding" effect continues among competitors.

"Investors are so sensitive to fees that we see Vanguard's influence all over the place," said Balchunas. "That's why Vanguard's PAS is the scariest three letters to financial advisers. It's the Amazon of finance — if Amazon goes into a business, everyone shudders, and it's the same with Vanguard."

If you try Vanguard PAS, the annual advisory service costs are:

The minimum investment to qualify for PAS is an account starting at $50,000. To learn more, visit the Vanguard website or download the brochure: https://personal.vanguard.com/pdf/vpabroc.pdf .

For investors with at least $500,000, PAS provides unlimited access to personal dedicated advisers through calls, emails, or video conferences. Clients with under $500,000 can still access Vanguard's team of advisers, but won't have their own personal advisers. They choose from Admiral class shares of Vanguard index mutual funds and ETF shares, if needed.

About 90 percent of the platform's assets are from clients who already had accounts with Vanguard, according to Financial Planning magazine. And some of them are Bogleheads. Here's what they had to say.

PAS is "a lot like training wheels," wrote one on Bogleheads.org, the website maintained by followers of Bogle.

For those who want to put money to work in the stock and bond market, but don't understand asset allocation, Vanguard's PAS can be ideal. Some Bogleheads say they use PAS initially to get comfortable with asset allocation. Once they do it themselves for a year or two, some keep PAS while others stop using it and change funds on their own.

"PAS services are most useful if you really want to be a hands-off investor," wrote Boglehead Lafder in January. "They will tell you what investments to make, and contact you when rebalancing is necessary to meet your set asset allocation. If you write out an investment plan, folks here can help you do that, and help you make decisions on rebalancing."

"You do not need PAS services to move your money," Lafder added. "Vanguard's concierge service is glad to help you jump through any needed forms and signatures to get your money transferred to them."

"For us, the value of the PAS is in the distribution part of the equation. Throughout our working years, I loved the saving and investing part but, now that I'm retired, have no desire to 'work' at the income-management part," wrote Retire57 on the site.

"I recently signed on to the PAS program and am just getting underway with it as it will allow my wife and [me] to simplify things and make it easier for my wife should I pass before her," wrote FXDXontherun. "I echo the sentiments above except over time as I educate myself on the management/draw-down part of this, I would like to handle it myself but for now, the PAS service makes sense."

What Bogleheads don't like about PAS? Being forced to sell their old funds to get into PAS's new funds.

Vanguard clients who are familiar with the top-performing actively managed funds resent having to sell those to enroll in PAS. And if you switch from another brokerage firm, there can be capital gains if you sell. Vanguard's senior management recognizes that there are issues with the tax-management piece of its hybrid adviser, as Frank Kolimago, head of Vanguard Personal Advisor Services, said last year in an interview with FS Rankings.

"Due to capital gains taxes, sometimes it is worth holding onto a long-held fund or stock rather than paying the taxes to change it," noted another Boglehead.

"Basically PAS is a plain vanilla low-cost asset-allocation service, and there's very little customization. The advisers they employ have little wiggle room in terms of building your portfolio," said Dan Wiener, who manages over $5 billion in assets, much of it in Vanguard funds. Wiener, publisher of the Independent Adviser for Vanguard Investors newsletter, sells advice to people choosing Vanguard funds in competition with the company's own advisory services. He shared some of his clients' views on Vanguard PAS:

"VPAS wanted me to sell my Vanguard Capital Opportunities fund. That's when I decided not work with them."

"They wanted to 'blow up' my portfolio by selling everything I have and moving it into their recommended funds [usually a few index funds] without taking into consideration taxes or other issues that were important to me."

"No customization. They won't work with you with what you have – i.e. you have to sell everything. Which means large gains."

"They wanted to completely sell out my existing portfolio, realizing about $95K in gains. No discussion of doing it over 2 or 3 tax years, or asking 'Do you have any tax loss carryforwards to help shelter some of the gains?'  And, they wanted to sell my entire position in Vanguard Health Care."

"As a client," added Terri McDermott, director of wealth planning at Fortis Wealth in King of Prussia, "I would want a deeper analysis of the tax impact on my particular situation, not a vague promise that I will be ahead at some time in the future."

Wesley Gray, CEO of Alpha Architect in Broomall, said, "Vanguard's declaring war on financial advisers, squeezing the last 100 basis points out of their fees. We use their products, but we don't think of ourselves as a competitor, because we have a niche business."

So for those of you who like self-driving cars, Vanguard PAS may be a good way to set and forget your investments, and let the firm rebalance quarterly for you. But if you're interested in driving yourself, PAS may not be for you.