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Vanguard Chief to FAs: Offer More Services or Fall Behind

January 27, 2016

Vanguard CEO Bill McNabb has warned advisors to adapt to low-fee competition from robo-advisors and be prepared for much leaner returns from equities in the coming years, according to news reports.

The “low-cost revolution” is moving from the product side of the business to financial advice, McNabb said at the Inside ETFs conference Tuesday, according to Financial Advisor magazine. Advisors are adapting already: according to Morningstar data cited by McNabb, 28% of advisors now rely solely on a fee-only model, while just 3% are commission-only, the magazine writes.

At the same time, McNabb says there is no longer any downward fee pressure from the robo advisors, which have reached a floor, and comparing automated platforms to human advisors is fruitless anyway, he claims.

To be part of the technological revolution, McNabb says advisors need to offer “caring in-person individualized services” the likes of which robos cannot provide, according to a Vanguard press release. But advisors also need to harness technology to further automate their own processes for a better client experience, he says.

On the flip side, portfolio construction is no longer enough to differentiate a practice and advisors should offer broader advice on more specific topics, such as retirement, Social Security and long-term care, and act as coaches and tax-efficiency counselors, according to the press release.

Bill McNabb

McNabb also says advisors will need to prepare clients for lower returns, according to Financial Advisor magazine. A 60/40 equity-bond portfolio is expected to return between 5% and 7% over the next 10 years – or just 3% to 5% after inflation adjustment, according to McNabb.

But there’s no need to panic; there will not be a repeat of 2008 this year, McNabb says, according to CNBC.com.

Expectations will need to be adjusted, however, in particular in regard to current savings rates of investors preparing for retirement, he told the news network.

The CEO also says the proliferation of ETFs is too similar to the mutual fund boom in the 1980s and could end just as poorly, according to ThinkAdvisor. The director of ETFs at FactSet told the web publication that 285 new funds were launched last year.

The sector posted record net inflows of $242 billion – or a jump of about 10% – while mutual funds had $125 billion in outflows, according to CNBC.com.

However, this month alone ETFs had $7.87 billion in net outflows, according to XTF ETF experts cited by the news network.

By Alex Padalka
  • To read the CNBC article cited in this story, click here.
  • To read the FA Magazine article cited in this story, click here.
  • To read the ThinkAdvisor article cited in this story, click here.