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Vanguard: UK wealth management's disrupter, nemesis or saviour?
17/05/2017 , Ian Orton

The news that Malvern, Pennsylvania-based Vanguard, the global pioneer of low-cost passive and active fund management, is to provide UK private investors with direct access to a family of 65 investment funds, had a predictable effect on its London listed-competitors. Their share prices fell and, in some cases, significantly.

Bristol-based Hargreaves Lansdown, the UK’s biggest provider of execution only (XO) and investment platform services as well as one of its most profitable firms active in the wealth management sector, experienced a 6.2 percent fall in its share price.

The shares prices of big investment management firms such as Henderson Group (-2.46 percent), Aberdeen Asset Management (-1.23 percent), Ashmore Group (- 0.99 percent), Schroders (-0.44 percent) and Standard Life (- 0.11 percent) experienced smaller falls, albeit on the day that the UK market registered an all-time high for the third consecutive day.

The impact of Vanguard’s announcement on London-listed specialist wealth management firm was less clear cut. The shares of St James’s Place, which does have a big mutual fund family, fell by 0.78 percent. Brewin Dolphin (-0.45 percent) and Brooks Macdonald (-0.19 percent) also fell. But the share price of Rathbones bucked the trend by registering a 2.35 percent increase.

Overall the market’s initial opinion on Vanguard’s latest initiative is that it spells bad news for firms active in the UK wealth management sector, especially in the investment platform and investment funds sector.

Or does it?

Back in the 1990s and early 2000s when this writer wrote many evangelical articles on the virtues of Vanguard Group and John (Jack) Bogle, its visionary if idiosyncratic founder, as a pioneer of both passive investment management and low-cost investing where the customer really did come first, a direct presence in the UK could have had a profound influence on the tectonic plates underpinning an extremely staid UK wealth management sector.

But times, not to mention the wealth management market, have moved on.

The UK has started to wake-up to the virtues of passive investment management, the investment platform (or investment funds supermarket as early incarnations were called) and even greater transparency and lower cost investment (although there is still further progress to be made here as Gina Miller, amongst others, never fails to point out).

Regulation, not least the Financial Conduct Authority’s retail distribution review (RDR), has also addressed some of the worst “Spanish practices” that typified the way in which investment management services were sold to investors.

The net result has been to reduce the costs of investment as well as to increase its overall transparency, although there is much more to be achieved in this respect.

Furthermore, Vanguard has had a presence in the UK market for the past eight years, albeit with a specific focus on the intermediary and wealth management sector, rather than the “direct” or retail market segment where it initially made its presence felt in the US market.

The point is that UK investors, along with their wealth managers can already access Vanguard’s funds, albeit at higher prices than the firm currently offers, especially if bought from investment platforms.

Hargreaves Lansdown, for example, currently list more than 20 Vanguard funds on its Vantage platform. And Vanguard funds also feature regularly on the “buy lists” of both investment and wealth management advisory firms as well as in portfolios overseen by discretionary investment managers.

Nonetheless, the price savings offered by Vanguard on its new platform are considerable and could provide an incentive for self-directed investors to transfer to the US firm. With an annual administration fee of 0.15 percent and an asset weighted ongoing charge figure (OCF) Vanguard of 0.24 percent will undercut Hargreaves Lansdown by a considerable margin.

And given that Vanguard is effectively returning to its roots by focusing on the individual it is increasingly that more of the UK’s army of self-directed investors will be increasingly made aware of the Vanguard “advantage”.    

The real worry for most mainstream UK wealth managers is that Vanguard moves into the advisory sector or become a wealth management firm in its own right (as it appeared to be doing in the US when this writer visited it in 2001). If it did so its focus on low costs backed-up by very high service levels could cause real damage.

For the moment Vanguard does not appear to have UK ambitions in this segment.

Furthermore, Vanguard will have to expand the scope of its offering to make itself more attractive to investors managing their pension investments. Their new site offers Individual Savings Accounts (ISA) wrappers. But it doesn’t appear to offer a Self-Invested Private Pension wrapper (SIPP).

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