Vanguard’s Upcoming “Digital Advisor” Program

In the last couple of weeks several readers have requested that I discuss Vanguard’s upcoming Digital Advisor program.

So far, we don’t really have any information other than what is included in the brochure Vanguard filed with the SEC with regard to the program.

As far as what the program is, it looks like a standard robo-advisor platform, which in this case implements portfolios consisting of the ETF versions of Vanguard’s four “total market” funds (i.e., Vanguard Total Stock Market ETF, Vanguard Total International Stock ETF, Vanguard Total Bond Market ETF, and Vanguard Total International Bond ETF).

The program has a 0.20% all-in cost (i.e., advisory fee + cost of underlying ETFs) regardless of what allocation you have, which means that the advisory fee is roughly 0.15%.

Relative to the existing Vanguard Personal Advisor Services platform, noteworthy differences are:

• It costs about half as much,
• It’s robo-only (no human advisor), and
• It has a smaller account minimum ($3,000 instead of $50,000).

In terms of the underlying holdings, it’s super similar to Vanguard’s LifeStrategy or Target Retirement funds. It would be slightly more expensive than such a fund. (The difference in cost would grow if the LifeStrategy and/or Target Retirement funds eventually get less expensive due to switching to underlying ETFs or Admiral Shares instead of Investor Share versions of index funds.)

What will the Digital Advisor program offer that one of those all-in-one funds doesn’t offer?

The brochure includes the following statement:

“When requesting that Digital Advisor manage your enrolled accounts, you’ll have the ability to impose reasonable restrictions on the management of your Portfolio by personalizing the inputs into your retirement accumulation goal beyond standardized defaults.”

It’s hard to tell without seeing the interface and without anybody actually having gone through the program, but the above makes it sound to me like there will be some option to customize the allocation among those 4 funds somewhat. (For example, I personally would appreciate the option to reduce the allocation to the international bond fund. It sounds like that would probably be a choice, but it’s not super explicit.)

One thing that the new program will offer is implementation of a basic asset location plan. The brochure includes the following statement:

“For Portfolios containing both taxable and tax-advantaged accounts, our investment strategy will aim to optimize the tax efficiency of the Portfolio by recommending or allocating investments strategically among taxable and tax-advantaged accounts. The objective of this ‘asset location’ approach is to hold relatively tax-efficient investments, such as broad-market stock index products, in taxable accounts while keeping relatively tax-inefficient investments, such as taxable bonds, in tax-advantaged accounts.”

So based on the incomplete information available at this time, it largely strikes me as “LifeStrategy/Target Retirement replacement for people with assets in taxable accounts” or “LifeStrategy/Target Retirement replacement for people who want some allocation among those 4 underlying holdings that is not available via those all-in-one funds.”

But I suppose we’ll learn more once the program is actually available.