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Vanguard Digital - A cheaper cousin of Vanguard PAS Fidelity Go Schwab SIP - High cash allocation is kept in Schwab Bank; other variations. Betterment - Was fined by the SEC for errors in tax-harvesting algorithm & poor disclosure. Wealthfront - Uses direct-indexing; allows some cryptos; acquisition by UBS fell through.
According to M*, "Vanguard and Fidelity Go stood out as the best options, although [it] also assigned above-average scores to Schwab Intelligent Portfolios, Betterment, and Wealthfront." Vanguard scored 4.8 out of 5, Fidelity Go 4.0, Schwab 3.6, Betterment and Wealthfront 3.5, with a couple of others at 3.4. Then there's a big drop off.
As M* points out, one must take care when comparing "all in" costs. Fidelity Go costs 35 basis points, though that is the "all in" cost since it uses 0.00% bp ER Fidelity Flex funds in its portfolios.
Vanguard Digital Advisor costs 20 basis points including underlying fund fees (i.e. this is an "all in" figure), but its hybrid PAS service costs 30 basis points plus underlying fee expenses. (It has recently shifted from Admiral shares to ETF shares, shaving perhaps one basis point from its "all in" cost.)
Schwab doesn't charge a wrap fee (i.e. you pay just the cost of the underlying funds), though as Yogi notes there's a cash drag (opportunity) cost.
Services vary significantly between offerings. Some are pure robo, others are hybrid. A few, including Vanguard, build in a glidepath rather than sticking with a fixed allocation based on risk tolerance.
The full report is worth reading, if for nothing else, its dozen+ exhibits comparing in tabular form the availability of different features, services and investment options, as well as costs, of all the different offerings.
There's a link to the full report in the M* piece referenced in the OP. (You do have to inform M* that you're an individual investor and provide email address to gain access.)
I'm inclined to think that with respect to advisory services, there are two major axes: degree of assistance desired (ranging from DIY to fully discretionary accounts) and degree of financial complexity involved.
M* suggests that as a first approximation, portfolio size is a fair indicator of complexity. The more money you have, the you tend to have special needs (e.g. complex estate planning). To this end, Exhibit 1 shows basic robo advisors targeted at the mass market (up to $100K), hybrid robos targeted more toward mass affluent ($500K to $2M), and wealth managers useful for some investors with over $2M in assets.
Obviously these are fuzzy divisions with much overlap. A not-so-wealthy individual with a complex family situation may need more help than a wealthy senior with no heirs or other issues. As you said, YMMV.
As a follow-up to their robo-advisor evaluation, M* conducted additional research. Two hypothetical investor profiles were created. Only seven of the 20 robo-advisors allow investors to complete risk assessments without registering. Their sample recommendations varied widely. Four robo-advisors recommended identical portfolios for both investor profiles. This was surprising since the investors' time horizons differed by 18 years.
Conclusion "Robo-advisors have one key purpose: to simplify and automate the investment process. However, our research underscores the fact that the resulting portfolios often vary. The upshot is that while robo-investing delivers on its promise to automate the investment process, investors should still do their own research and make sure they’re comfortable with the recommended portfolio before signing up with a specific provider."
My parent’s generation pays over 1% management fees on top of costly investment vehicles. Robo advisors when designed probably do serve their customers at a reasonable cost.
Robo (and to a lesser extent hybrid) advisors are designed for simpler situations - asset allocation, growing (or spending down) portfolios, tax loss harvesting, maybe targeting specific goals (amounts/dates when needed). 1% is too high a fee for these "basic plus" services.
The standard assumption is that younger people or people with modest portfolios don't need more sophisticated services (extensive tax planning, estate planning, trusts, etc). It's not a bad assumption but there are many exceptions: wealthy people without heirs just spending down retirement money don't need many services; young working class families dealing with health issues may.
”Something there is that doesn’t love a wall robo … “
Having never played around with any of these sophisticated tools, I’m curious how the rankings or relative performance numbers are arrived at? Granted, either a robo or real life advisor should be able to suggest risk adjusted portfolios based on age, time horizon, investor’s situation, etc. Where I’d have more trouble entrusting my allocation to a robo is within the larger macro picture.
- Are these robo’s aware that bonds recently experienced a 30 year bull market? That aberration affected not only bond returns. It also likely distorted other asset performance as well. Are robos capable of distinguishing between what worked over the last 30 years during falling interest rates and what might work over the next 2 or 3 decades?
- Does the robo take into consideration the difference between very low / negative inflation over the preceding 2 or 3 decades and the likely inflation scenario going forward? Can it comprehend and factor in how that monumental sea change might turn return on different assets on their heads? Assets that outperformed over a period of low inflation may not be the best ones in a radically different economic backdrop.
- Are these robos aware of the growing friction with China, Russia and how that may affect EM investments? Do they take into account the rise of populism around the world and growing political instability in many Western nations?
- Would robos have correctly foreseen the tech revolution in say 1975 (excuse the oxymoron) and would they have recommended the best investments over the next quarter century? Can they properly assess the impact AI may / may not have on investments?
- Can a robo correctly identify a bubble in an asset class and warn its clients to steer clear in a timely manner? (By definition, most humans cannot.) Or, might the robo have had you invested in Japan in the mid-90?
The above considerations extend far beyond basic issues of age, time horizon, risk tolerance. And they’re not necessarily resolved by examining charts of various investments over the past 30 years. Those who correctly analyze at least some of these real world questions and make responsible investment choices going forward should have an advantage over robos - as I understand them.
@MikeM has commented in the past that he runs both his own portfolio and one generated by Schwab’s robo adviser. So, his experiences would shed some light on these questions. Please understand my comments are offered as food for thought only. I have no experience using robos and am not a qualified investment advisor. I make no claims in either regard.
Possibly, a more appropriate reference to the same poem I began with (Frost’s Mending Wall) applies to myself here: “He moves in darkness, as it seems to me …”
@hank, I don't know what goes into the models that set portfolio construction. And likely all firms' algorithms are slightly different. No different than a Vanguard retirement fund compared to a TR Price or a Fidelity retirement fund. Do they adjust on all the micro circumstances you mentioned? I don't believe so, and I wouldn't want them to. They would be guessing and screwing up returns just like your average investor does per most investor return reports. The stability and convenience of a robo or a retirement fund is what you are paying for.
I have the Schwab robo. I recently cut it by a third. It has not returned as much as my self-managed portfolio this year. It's biggest drawback has been it's heavy weighting in EM and foreign stocks and it's 12% cash holding that sits in a very low interest savings account, not a money market. That cash is and has always been the fee you pay for the Schwab robo. The12% cash allotment is making almost nothing for me compared to their 5%+ MM in my self-managed. It didn't matter as much in the past, but it certainly does now. I estimate this 12% cash has now become about a 0.6% fee to own the CS robo. That is a fairly large fee in my opinion.
Good questions! I'm not an expert on robo-advisors. I recently worked with Vanguard Personal Advisor Services (PAS) to create a financial plan as a trial exercise. My thoughts are below.
- Are these robo’s aware that bonds recently experienced a 30 year bull market? That aberration affected not only bond returns. It also likely distorted other asset performance as well. Are robos capable of distinguishing between what worked over the last 30 years during falling interest rates and what might work over the next 2 or 3 decades?
Vanguard PAS uses the Vanguard Capital Markets Model (VCMM) to forecast returns for stocks, bonds, short-term reserves as well as inflation rates. The VCCM uses a statistical analysis of historical data for interest rates, inflation, and other risk factors for global equities, fixed income, and commodity markets to generate forward-looking distributions of expected long-term returns. I don't know what models other robo-advisors are using nor which factors they consider.
- Does the robo take into consideration the difference between very low / negative inflation over the preceding 2 or 3 decades and the likely inflation scenario going forward? Can it comprehend and factor in how that monumental sea change might turn return on different assets on their heads? Assets that outperformed over a period of low inflation may not be the best ones in a radically different economic backdrop.
Please refer to my answer above.
- Are these robos aware of the growing friction with China, Russia and how that may affect EM investments? Do they take into account the rise of populism around the world and growing political instability in many Western nations?
I don't think robo-advisors' models factor in rising populism or frictions with China/Russia.
- Would robos have correctly foreseen the tech revolution in say 1975 (excuse the oxymoron) and would they have recommended the best investments over the next quarter century? Can they properly assess the impact AI may / may not have on investments?
Robo-advisors could not have predicted the tech revolution nor can they properly assess the impact of AI.
- Can a robo correctly identify a bubble in an asset class and warn its clients to steer clear in a timely manner? (By definition, most humans cannot.) Or, might the robo have had you invested in Japan in the mid-90?
Robo-advisors can not identify bubbles in an asset class beforehand. However, their models may underweight "overvalued" assets.
Thanks @Observant1 / Great comments. Yes, if the firm has an intelligently / insightfully designed forecasting model to incorporate into the robo it should remove some of the concerns I raised. No reason to expect they wouldn’t devote their best resources to that effort.
Edit - It occurs to me however that past records (“Robo Advisor Evaluations”) are based on macro calls the firm made in the past under different conditions. That’s true of any backward looking performance evaluation. One hopes / expects their current analysis of changing fundamentals is as prescient as their earlier calls. (With 10% in a diversified TRP allocation fund, I’m beholden to a similar assumption.)
From some of the above observations and comments it seems worth noting that in the not too distant future the application of advanced AI to processes such as robo-advisors may make a major difference in their construction and performance.
Recently we have started working with Vanguard PAS Select program and have a dedicated advisor. Our ultimate goal is to have a human advisor to oversee our finance if and when I go before my time, and my wife and kids will be well care for. For now this is a new experiment for us.
After several rounds of discussion with my advisor, I have gained further insights on Vanguard capabilities that may to answer some of Hank’s and Old_Joe questions above.
1. VCCM uses a Monte Carlo algorithm based on historical financial data with respect to inflation rates, interest rates, market returns of stocks and bonds. Nevertheless, these are backward looking data and may have challenges in predicting future returns. Thus the model can look at various scenarios and calculates for the probabilities of various future outcomes. Realistically, there is no model exists today. AI and machine learning will likely be use more in assisting the Monte Carlo simulation in the future. Right now, their algorithms are simply not robust enough to enable self-driving cars are reliably, for example.
2. I asked my advisor the scenario question where it has higher than average 2% inflation rates for longer period, higher interest rates, and below average market return below, and how would VCCM model predicts and recommends the asset allocation. My advisor said that is a “good question” meaning he does not have the answer. But he said one needs to reconsider the withdrawal rates and monitor the portfolio to ensure that is still on track if this scenario plays out. That is a honest answer I can accept.
3. In the proposed plan I requested to have no emerging market exposure, especially in passive investing. This eliminated Total international market index fund and geopolitical risk of 30% EM. Developed market is acceptable. So we will use developed market index ETF instead. In our self-managed accounts, we will use specific active managers outside Vanguard managed accounts.
4. In Vanguard proposal plan, there is no cash position. There is only stocks and bonds for periodic rebalance purpose. Cash is considered a drag on portfolio performance. The plan is highly flexible that the advisors will work with clients to produce an asset allocation will meet the withdraw rate, portfolio return and volatility. Also the clients can choose all active and passive Vanguard funds aand ETFs available. One closed mutual fund, Capital Opportunity, was made available to PAS clients. Primecap, however, was not available (bummer). We chose 50:50 active:passive with 50% stocks and 50% bonds.
5. Lots of customerization from client’s perspective, we added short- and intermediate-term corporate bonds in addition to the total bond market index. In the future, we may add their newly created Core or Core-plus active ETFs. Outside the managed accounts, we compliment these bonds with other active managed bonds - high yield, bank loans, and global bonds.
Addition: PAS Select program provides few other services that we did not engage with the advisor in this early phase of working relationships. The human touch aspect is very good and their advisor phone number answer quickly.
@Sven - very nice writeup specifically addressing some questions asked here.
Curious that your advisor said VPMCX wasn't available. From the fund prospectus:
The Fund is closed to new accounts for investors not enrolled in Vanguard Flagship Services® or Vanguard Personal Advisor Services®. Clients of these services may open new Fund accounts, investing up to $25,000 per Fund account per year as described below, in individual, joint, and/or personal trust registrations.
My somewhat limited experience (all vicarious) with advisory services suggests that each provider slices and dices their offerings into so many different packages that it's difficult to tell one from another. Even the names confuse matters.
Your service, that you're calling "Vanguard PAS Select", is formally called "Vanguard Personal Advisor Select", though it was previously called "Vanguard Personal Advisor Services". In 2019, Vanguard launched its pure robo version, Vanguard Digital Advisor. Then in 2022, Vanguard launched a hybrid version of that, called "Vanguard Personal Advisor". As of now, there is no specific offering called Vanguard Personal Advisor Services (which is what comes to my mind with "PAS").
Here are the brochures and other disclosures in gory detail. I'm just beginning to compare and contrast them now. They seem to have buried within them all of the info in this thread plus more, but obviously much harder to extract than reading here.
Disregarding trust services (available in Select), there seem to be three differentiators between the services. (Could be many more, I'm just starting a deeper dive.)
1. Human financial advice/service - none for digital, team for Personal Advisor, dedicated individual for Select. Even this isn't clear, because the disclosure for Personal Advisor says that you get a dedicated individual once you reach $500K (the min for Select).
2. Management discretion - Digital and Personal are nondiscretionary (VG makes all decisions); Select is nondiscretionary (you must approve financial plan before VG executes it).
3. Price structure - Digital and Personal have gross fees (0.20%/0.25% and 0.35%/0.40% respectively for index/active portfolios) that are reduced by the Vanguard portion of ERs of the underlying holdings. Select charges 0.30% annually, with no reduction for the cost of underlying funds. (Over $5M AUM Select portfolios get a reduced fee.)
Sven mentioned that his managed portfolio has no cash. That's likely typical but not mandatory. Select says that on Oct 21, it will begin assessing its advisory fee on the "recommended allocations to cash equivalents in the discretionary advice offer." Until then, cash investment allocations are "free".
That cash is different from "spending cash". Select (and only Select) offers a "spending fund" (a MMF) for cash flows in and out of the managed portfolio. You can set upper and lower thresholds. Vanguard will move money in and out of the managed portfolio to keep within those thresholds. In the withdrawal phase, that's essentially your checking account.
As I continue to dig into the disclosures, I'll make corrections if needed to the above.
Very useful discussion but I think the key is how they programmed their robos.
If their models only look at historical data since the beginning of the Bond Bull Market, they may vastly under preform since the era of "free money" is over and bonds have almost had three years of negative returns in a row, a situation without historical precedence.
Relying on the 60/40 portfolio with bond index funds and SP500 indexes here seems pretty risky to me, especially when you can get over 5% in 2 year treasuries. The stock/bond correlation is quite positive.
Hopefully Vanguard is thinking out side of their "indexing Box". I always am concerned when you look at their decades long insistence that clients need significant international exposure. At some point that will be called for, but it has not worked for a long time.
I always am concerned when you look at their decades long insistence that clients need significant international exposure. At some point that will be called for, but it has not worked for a long time.
M* Rekenthaler mentioned exposure to international as one of the main drags on target-date retirement funds in a column this past summer.
Traditional 60/40 funds have done better in comparison.
It's an interesting read. I won't try to summarize it here. Follow the link.
M* Rekenthaler mentioned exposure to international as one of the main drags on target-date retirement funds in a column this past summer.
Just thought I'd try to show what a dragging portfolio Vanguard's recommended retired fund has been the last year or so. (If readable.)
VTINX Target Income Composition 01/01/2023 Ticker % portfolio Vanguard Total Bond Market II VTBIX 37.00% Vanguard Total Stock Market Institutional VSMPX 18.00% Vanguard Short-Term Inflation-Protected VTAPX 16.30% Vanguard Total International Bond II Index Fund VTILX 16.20% Vanguard Total International Stock Investor Shares VGTSX 12.50% VTINX Portfolio 100.00%
@msf, Vanguard often written things in simple language. Many may interpret Vanguard being a plain old indexer and that is simply untrue (have equally number actively managed funds).
As you posted the comparison between different PAS plans: Digital Advisor ($3K minimum), Personal Advisor ($50K minimum), Personal Advisor Select ($500K minimum), and Wealth Management ($5M minimum). All plans have active funds options.
We chose Personal Advisor Select since we want need additional advice on personal financial planning and personal trust service. A dedicated advisor seems to work very effectively for us.
As I stated earlier, Vanguard's proposal is far from being a cookie-cutter plan filled with index funds. It is built based on our risk tolerance, withdraw need with respect to time and from which tax-deferred accounts. The advisor constructed the proposal to include actively managed short and intermediate term investment grade bond funds (not just a total bond market index fund) and a total international bond index fund (we have little exposure to this asset class), plus others I mentioned above. Our advisor is well aware of the inverted yield curve and our bonds spread between short and intermediate term duration; no long duration bonds. In addition, we requested to shift more of bonds to my accounts and more stocks to my wife since they will be withdraw 5 years later.
In the end, I believe the clients have the equal responsibility to work with their advisors in order to put together a solid asset allocation plan so to meet their future needs.
Thank you for your "Dynamic Cash Flow" example, I am putting together a spreadsheet for our Roth conversion plan. Even though we have taken advantage of Roth 401(K) when it was available. Still we have sizable traditional IRAs to convert and the tax saving is substantial in our case.
In the end, I believe the clients have the equal responsibility to work with their advisors in order to put together a solid asset allocation plan so to meet their future needs.
Wow are you on the mark. I know a few people who are using advisors at different institutions who have little interaction with their advisors - just periodic check ins or reports and conversations about cash flow needs. I was even recently asked to review an advisor's suggestions.
I try to explain: if you are paying for a service, use it. If you don't understand something talk with the advisor. If you're still not comfortable and the advisor won't accommodate you, move.
There are people who want to be completely hands off, or as close as one can get. For them, something like Vanguard Personal Advisor (hybrid robo) with index funds may be a good fit. Handholding, but without the added expense for customizations. For many people here, who take at least a somewhat more active interest, a service like Personal Advisor Select may work well.
Regarding Vanguard's index robo service (with or without human advisor):
If you are considering investing through a total market index investment setting, you should understand that each of the Four Totals [Total Stock, Total Bond, Total Int'l Stock, Total Int'l Bond] is a share class of the mutual funds that are used (or are substantially similar to the mutual funds used) in Vanguard’s Target Retirement Funds. In certain circumstances, your recommended standard portfolio will contain identical allocations to the four Total Funds that are available in a Vanguard Target Retirement Fund, which is generally available at a lower cost than the Services.
You should consider the advisory fees and Vanguard ETFs expense ratios you will incur upon enrollment as well as the personalized features and additional services that are available through each Service in comparison to the lower costs and absence of personalized services of Vanguard single fund [target date] solutions when considering the managed offer.
Robo investing does work given time and patience. For example, many state sponsored 529 plans employ low cost broadly diversified index funds. The state adds a smaller layer of fees as the administrator. Overall fees are still very good. Automatic shifting allocation from stocks to bonds (eventually money market fund) is available today. If started early enough, the parents have 18 years to invest for their child’s college education. We are very fortunate to use the 529 plan to put our kids through college.
Simple question. Have robos gotten their clients out of the cap weighted S&P 500 - or at least reduced exposure this year? Hard to find market observers who think that’s currently reasonably valued.
If I had a robo I’d expect quarterly updates. If they could help in making tactical mid-course corrections every quarter or two they’d earn their pay. Annual course corrections would be better than nothing. But if all they can do is recommend longer term multi-year allocation models suitable for age and situation, then there are many sources of information to assist an experienced investor is charting and staying the course.
Comments
Vanguard Digital - A cheaper cousin of Vanguard PAS
Fidelity Go
Schwab SIP - High cash allocation is kept in Schwab Bank; other variations.
Betterment - Was fined by the SEC for errors in tax-harvesting algorithm & poor disclosure.
Wealthfront - Uses direct-indexing; allows some cryptos; acquisition by UBS fell through.
www.morningstar.com/specials/your-guide-to-getting-started-with-robo-investing#best
As M* points out, one must take care when comparing "all in" costs. Fidelity Go costs 35 basis points, though that is the "all in" cost since it uses 0.00% bp ER Fidelity Flex funds in its portfolios.
Vanguard Digital Advisor costs 20 basis points including underlying fund fees (i.e. this is an "all in" figure), but its hybrid PAS service costs 30 basis points plus underlying fee expenses. (It has recently shifted from Admiral shares to ETF shares, shaving perhaps one basis point from its "all in" cost.)
Schwab doesn't charge a wrap fee (i.e. you pay just the cost of the underlying funds), though as Yogi notes there's a cash drag (opportunity) cost.
Services vary significantly between offerings. Some are pure robo, others are hybrid. A few, including Vanguard, build in a glidepath rather than sticking with a fixed allocation based on risk tolerance.
The full report is worth reading, if for nothing else, its dozen+ exhibits comparing in tabular form the availability of different features, services and investment options, as well as costs, of all the different offerings.
There's a link to the full report in the M* piece referenced in the OP. (You do have to inform M* that you're an individual investor and provide email address to gain access.)
Full report
Kipingler Oct. issue does their own survey of online brokers , only TRP & Vanguard didn't participate.
M* suggests that as a first approximation, portfolio size is a fair indicator of complexity. The more money you have, the you tend to have special needs (e.g. complex estate planning). To this end, Exhibit 1 shows basic robo advisors targeted at the mass market (up to $100K), hybrid robos targeted more toward mass affluent ($500K to $2M), and wealth managers useful for some investors with over $2M in assets.
Obviously these are fuzzy divisions with much overlap. A not-so-wealthy individual with a complex family situation may need more help than a wealthy senior with no heirs or other issues. As you said, YMMV.
Two hypothetical investor profiles were created.
Only seven of the 20 robo-advisors allow investors to complete risk assessments without registering.
Their sample recommendations varied widely.
Four robo-advisors recommended identical portfolios for both investor profiles.
This was surprising since the investors' time horizons differed by 18 years.
Conclusion
"Robo-advisors have one key purpose: to simplify and automate the investment process.
However, our research underscores the fact that the resulting portfolios often vary.
The upshot is that while robo-investing delivers on its promise to automate the investment process,
investors should still do their own research and make sure they’re comfortable with the recommended
portfolio before signing up with a specific provider."
Not All Robo-Advisors Are Created Equal
Robo (and to a lesser extent hybrid) advisors are designed for simpler situations - asset allocation, growing (or spending down) portfolios, tax loss harvesting, maybe targeting specific goals (amounts/dates when needed). 1% is too high a fee for these "basic plus" services.
The standard assumption is that younger people or people with modest portfolios don't need more sophisticated services (extensive tax planning, estate planning, trusts, etc). It's not a bad assumption but there are many exceptions: wealthy people without heirs just spending down retirement money don't need many services; young working class families dealing with health issues may.
wallrobo … “Having never played around with any of these sophisticated tools, I’m curious how the rankings or relative performance numbers are arrived at? Granted, either a robo or real life advisor should be able to suggest risk adjusted portfolios based on age, time horizon, investor’s situation, etc. Where I’d have more trouble entrusting my allocation to a robo is within the larger macro picture.
- Are these robo’s aware that bonds recently experienced a 30 year bull market? That aberration affected not only bond returns. It also likely distorted other asset performance as well. Are robos capable of distinguishing between what worked over the last 30 years during falling interest rates and what might work over the next 2 or 3 decades?
- Does the robo take into consideration the difference between very low / negative inflation over the preceding 2 or 3 decades and the likely inflation scenario going forward? Can it comprehend and factor in how that monumental sea change might turn return on different assets on their heads? Assets that outperformed over a period of low inflation may not be the best ones in a radically different economic backdrop.
- Are these robos aware of the growing friction with China, Russia and how that may affect EM investments? Do they take into account the rise of populism around the world and growing political instability in many Western nations?
- Would robos have correctly foreseen the tech revolution in say 1975 (excuse the oxymoron) and would they have recommended the best investments over the next quarter century? Can they properly assess the impact AI may / may not have on investments?
- Can a robo correctly identify a bubble in an asset class and warn its clients to steer clear in a timely manner? (By definition, most humans cannot.) Or, might the robo have had you invested in Japan in the mid-90?
The above considerations extend far beyond basic issues of age, time horizon, risk tolerance. And they’re not necessarily resolved by examining charts of various investments over the past 30 years. Those who correctly analyze at least some of these real world questions and make responsible investment choices going forward should have an advantage over robos - as I understand them.
@MikeM has commented in the past that he runs both his own portfolio and one generated by Schwab’s robo adviser. So, his experiences would shed some light on these questions. Please understand my comments are offered as food for thought only. I have no experience using robos and am not a qualified investment advisor. I make no claims in either regard.
Possibly, a more appropriate reference to the same poem I began with (Frost’s Mending Wall) applies to myself here: “He moves in darkness, as it seems to me …”
I have the Schwab robo. I recently cut it by a third. It has not returned as much as my self-managed portfolio this year. It's biggest drawback has been it's heavy weighting in EM and foreign stocks and it's 12% cash holding that sits in a very low interest savings account, not a money market. That cash is and has always been the fee you pay for the Schwab robo. The12% cash allotment is making almost nothing for me compared to their 5%+ MM in my self-managed. It didn't matter as much in the past, but it certainly does now. I estimate this 12% cash has now become about a 0.6% fee to own the CS robo. That is a fairly large fee in my opinion.
Edit - It occurs to me however that past records (“Robo Advisor Evaluations”) are based on macro calls the firm made in the past under different conditions. That’s true of any backward looking performance evaluation. One hopes / expects their current analysis of changing fundamentals is as prescient as their earlier calls. (With 10% in a diversified TRP allocation fund, I’m beholden to a similar assumption.)
After several rounds of discussion with my advisor, I have gained further insights on Vanguard capabilities that may to answer some of Hank’s and Old_Joe questions above.
1. VCCM uses a Monte Carlo algorithm based on historical financial data with respect to inflation rates, interest rates, market returns of stocks and bonds. Nevertheless, these are backward looking data and may have challenges in predicting future returns. Thus the model can look at various scenarios and calculates for the probabilities of various future outcomes. Realistically, there is no model exists today. AI and machine learning will likely be use more in assisting the Monte Carlo simulation in the future. Right now, their algorithms are simply not robust enough to enable self-driving cars are reliably, for example.
2. I asked my advisor the scenario question where it has higher than average 2% inflation rates for longer period, higher interest rates, and below average market return below, and how would VCCM model predicts and recommends the asset allocation. My advisor said that is a “good question” meaning he does not have the answer. But he said one needs to reconsider the withdrawal rates and monitor the portfolio to ensure that is still on track if this scenario plays out. That is a honest answer I can accept.
3. In the proposed plan I requested to have no emerging market exposure, especially in passive investing. This eliminated Total international market index fund and geopolitical risk of 30% EM. Developed market is acceptable. So we will use developed market index ETF instead. In our self-managed accounts, we will use specific active managers outside Vanguard managed accounts.
4. In Vanguard proposal plan, there is no cash position. There is only stocks and bonds for periodic rebalance purpose. Cash is considered a drag on portfolio performance. The plan is highly flexible that the advisors will work with clients to produce an asset allocation will meet the withdraw rate, portfolio return and volatility. Also the clients can choose all active and passive Vanguard funds aand ETFs available. One closed mutual fund, Capital Opportunity, was made available to PAS clients. Primecap, however, was not available (bummer). We chose 50:50 active:passive with 50% stocks and 50% bonds.
5. Lots of customerization from client’s perspective, we added short- and intermediate-term corporate bonds in addition to the total bond market index. In the future, we may add their newly created Core or Core-plus active ETFs. Outside the managed accounts, we compliment these bonds with other active managed bonds - high yield, bank loans, and global bonds.
Addition: PAS Select program provides few other services that we did not engage with the advisor in this early phase of working relationships. The human touch aspect is very good and their advisor phone number answer quickly.
Curious that your advisor said VPMCX wasn't available. From the fund prospectus: My somewhat limited experience (all vicarious) with advisory services suggests that each provider slices and dices their offerings into so many different packages that it's difficult to tell one from another. Even the names confuse matters.
Your service, that you're calling "Vanguard PAS Select", is formally called "Vanguard Personal Advisor Select", though it was previously called "Vanguard Personal Advisor Services". In 2019, Vanguard launched its pure robo version, Vanguard Digital Advisor. Then in 2022, Vanguard launched a hybrid version of that, called "Vanguard Personal Advisor". As of now, there is no specific offering called Vanguard Personal Advisor Services (which is what comes to my mind with "PAS").
Here are the brochures and other disclosures in gory detail. I'm just beginning to compare and contrast them now. They seem to have buried within them all of the info in this thread plus more, but obviously much harder to extract than reading here.
Personal Advisor Select: https://personal.vanguard.com/pdf/vpabroc.pdf
Digital Advisor (robo) / Personal Advisor (hybrid):
https://personal.vanguard.com/pdf/vanguard-digital-advice-brochure.pdf
Here's Vanguard's advisory services comparison page:
https://investor.vanguard.com/advice/compare-investment-advice#comparison-chart
Disregarding trust services (available in Select), there seem to be three differentiators between the services. (Could be many more, I'm just starting a deeper dive.)
1. Human financial advice/service - none for digital, team for Personal Advisor, dedicated individual for Select. Even this isn't clear, because the disclosure for Personal Advisor says that you get a dedicated individual once you reach $500K (the min for Select).
2. Management discretion - Digital and Personal are nondiscretionary (VG makes all decisions); Select is nondiscretionary (you must approve financial plan before VG executes it).
3. Price structure - Digital and Personal have gross fees (0.20%/0.25% and 0.35%/0.40% respectively for index/active portfolios) that are reduced by the Vanguard portion of ERs of the underlying holdings. Select charges 0.30% annually, with no reduction for the cost of underlying funds. (Over $5M AUM Select portfolios get a reduced fee.)
Sven mentioned that his managed portfolio has no cash. That's likely typical but not mandatory. Select says that on Oct 21, it will begin assessing its advisory fee on the "recommended allocations to cash equivalents in the discretionary advice offer." Until then, cash investment allocations are "free".
That cash is different from "spending cash". Select (and only Select) offers a "spending fund" (a MMF) for cash flows in and out of the managed portfolio. You can set upper and lower thresholds. Vanguard will move money in and out of the managed portfolio to keep within those thresholds. In the withdrawal phase, that's essentially your checking account.
As I continue to dig into the disclosures, I'll make corrections if needed to the above.
If their models only look at historical data since the beginning of the Bond Bull Market, they may vastly under preform since the era of "free money" is over and bonds have almost had three years of negative returns in a row, a situation without historical precedence.
Relying on the 60/40 portfolio with bond index funds and SP500 indexes here seems pretty risky to me, especially when you can get over 5% in 2 year treasuries. The stock/bond correlation is quite positive.
Hopefully Vanguard is thinking out side of their "indexing Box". I always am concerned when you look at their decades long insistence that clients need significant international exposure. At some point that will be called for, but it has not worked for a long time.
Traditional 60/40 funds have done better in comparison.
It's an interesting read. I won't try to summarize it here. Follow the link.
I don think bonds, esp those with long duration, with their current high correlation to stocks provide much diversification currently.
As you posted the comparison between different PAS plans: Digital Advisor ($3K minimum), Personal Advisor ($50K minimum), Personal Advisor Select ($500K minimum), and Wealth Management ($5M minimum). All plans have active funds options.
We chose Personal Advisor Select since we want need additional advice on personal financial planning and personal trust service. A dedicated advisor seems to work very effectively for us.
As I stated earlier, Vanguard's proposal is far from being a cookie-cutter plan filled with index funds. It is built based on our risk tolerance, withdraw need with respect to time and from which tax-deferred accounts. The advisor constructed the proposal to include actively managed short and intermediate term investment grade bond funds (not just a total bond market index fund) and a total international bond index fund (we have little exposure to this asset class), plus others I mentioned above. Our advisor is well aware of the inverted yield curve and our bonds spread between short and intermediate term duration; no long duration bonds. In addition, we requested to shift more of bonds to my accounts and more stocks to my wife since they will be withdraw 5 years later.
In the end, I believe the clients have the equal responsibility to work with their advisors in order to put together a solid asset allocation plan so to meet their future needs.
Thank you for your "Dynamic Cash Flow" example, I am putting together a spreadsheet for our Roth conversion plan. Even though we have taken advantage of Roth 401(K) when it was available. Still we have sizable traditional IRAs to convert and the tax saving is substantial in our case.
Wow are you on the mark. I know a few people who are using advisors at different institutions who have little interaction with their advisors - just periodic check ins or reports and conversations about cash flow needs. I was even recently asked to review an advisor's suggestions.
I try to explain: if you are paying for a service, use it. If you don't understand something talk with the advisor. If you're still not comfortable and the advisor won't accommodate you, move.
There are people who want to be completely hands off, or as close as one can get. For them, something like Vanguard Personal Advisor (hybrid robo) with index funds may be a good fit. Handholding, but without the added expense for customizations. For many people here, who take at least a somewhat more active interest, a service like Personal Advisor Select may work well.
Regarding Vanguard's index robo service (with or without human advisor):
If I had a robo I’d expect quarterly updates. If they could help in making tactical mid-course corrections every quarter or two they’d earn their pay. Annual course corrections would be better than nothing. But if all they can do is recommend longer term multi-year allocation models suitable for age and situation, then there are many sources of information to assist an experienced investor is charting and staying the course.