Finally, Investment Advice That Won’t Rob You Blind

The Department of Labor released its final regulation on what’s known as the Fiduciary Rule. The rule requires those offering paid financial advice on retirement accounts to put their client’s interests first. While at first glance the rule seems anything but objectionable, it raises some concerns.

One key concern is cost. While fee-only advisors promote the fact that they take no money from the investments they recommend, little is said about their fees. Even a fee of 1% of assets under management can reduce a portfolio by hundreds of thousands of dollars over a lifetime of investing.

Enter Vanguard. For just 30 basis points (that's 0.3%) of assets under management, Vanguard will manage an investor's portfolio. It's called Vanguard Personal Advisor Services, and it's run by Frank Kolimago.

Frank was kind enough to join me on the podcast for a detailed interview about Vanguard's services. In the interview, we talk about how the service works, the cost, and how you can get started if you are interested in the service.

Transcript of Interview with Vanguard's Frank Kolimago

Rob: Frank, welcome to the show. Frank: Hi, it’s great to be here. Rob: I appreciate you taking the time to come and talk with us today. I talk a lot about Vanguard and the investment advisory services. I tell my listeners that if I ever get hit by a truck, I’ve asked my wife to hire you guys to manage our investments so I’m thrilled to have you on the show. Why don’t you give the listeners a bit of an idea of who you are and what you do there at Vanguard.

Frank: Thanks, Robert. It’s a pleasure to be here. My name is Frank Kolimago and I head up the retail advice business here at Vanguard. I’ve been with the company for about 20 years now. In my role, I oversee the teams of advisors who provide advice through our newest service that we call, Personal Advisor Services.

Rob: Naturally, that’s the focus of today. If someone wanted to consider or perhaps use Vanguard’s Personal Advisor Services and they call in, walk us through the process. What would be the first thing that would happen?

Frank: Sure. The first thing that would happen is that we would work with the client to get them an investor questionnaire. It’s a pretty straightforward questionnaire of about 15 questions that would help them describe things such as their goals, their risk tolerance and a little bit of background about their situation. That information then becomes the catalyst for us to create a financial plan for the client. We would look at that information. We would put it into our models. We would actually have a conversation with them and really probe and drill down a bit to understand what their objectives are, and to make sure we’ve fully grasped what their objectives are. Then we would actually produce a financial plan for them. We would set up another conversation to review that with the client and we would set up an asset allocation. At that point, if the conversation led to a desire to enter into an ongoing advised relationship, then we would put that in place and begin to work with the client on an ongoing basis and provide them with the advisory service.

Rob: I take it the financial plan you’ve described is put together by a CFP, a certified financial planner at Vanguard?

Frank: The majority of our advisors do have that certified financial planning designation or they’re working towards it. In our personal advisor services group, presently we have about 350 advisors as part of the team.

Rob: Wow. So if someone were to sign up for this, would they be assigned one of those individuals to their accounts?

Frank: They would. Everybody works with an advisor on an ongoing relationship. It’s a key part of the service. And what we do is, at a break-point of about $500,000 in assets and above, you have an ongoing dedicated advisor. It’s more of a team-based approach for investors who, starting at the entry point for our service which is $50,000, up to that $500,000, and beyond that, it’s an ongoing named relationship of an advisor that the person would work with.

Rob: Okay, so $50,000 is the minimum to use Vanguard’s advisory services. Frank: That’s correct. Rob: Then once you’ve hit above $500,000, you’re actually assigned a dedicated representative to work with?

Frank: Correct. For example, if you’re coming in at the lower asset level you would work with a named person though too. They will set up the plan, go through those initial consultations and do the really deep conversations that take place to ensure that the investor has a well-grounded plan as far as the opportunity of working with Vanguard on an ongoing basis.

Rob: Those minimums— let’s say the $50,000 minimum, can that be spread over a taxable account of say, $40,000 and an IRA of $10,000? Can you combine accounts if they’re both going to go under an advisory services umbrella?

Frank: Yes, Rob. You certainly can. And we would look at all different sources, both taxable and tax-deferred type relationships as part of that holistic picture. That’s one of the benefits of personal advisors, is that we are looking at a variety of account types and a variety of goals for the investor to make sure that we give them custom, comprehensive, financial planning advice.

Rob: Okay. So when you put together an asset allocation plan, in addition to stocks versus bonds and other things, are you also looking at asset location between tax-advantaged accounts and taxable accounts?

Frank: Absolutely. We’re considering all of that when we structure portfolios. One of the goals is to make sure we give our clients in these ‘advised relationships’ tax-efficient advice. So we’re considering all those different structures to make sure it’s in the best interest of the end client.

Rob: This will be the dumbest question I’ll ask in the interview, probably, but I’ll ask it anyway, Frank. When you implement the asset allocation plan, is it fair to say that you implement it with only Vanguard mutual funds or ETFs?

Frank: We really do recommend Vanguard funds as part of when we’re constructing a well-balanced, diversified portfolio for our clients. We do that for a few reasons, as you can imagine. One is that the Vanguard funds have very low fees. They’re very well diversified. At the end of the day, they’re best-in-class offerings. We do have the ability too, though, to consider non-Vanguard holdings as part of the portfolio. For example, let’s say that an investor had a large embedded capital gain. We wouldn’t want to sell that out, necessarily, and incur that gain prematurely. So we can work around situations like that and consider it as part of the overall asset allocation. When it comes to recommending funds, we do recommend Vanguard funds as part of the service.

Rob: I guess that raises another question for me. Let’s say someone comes to you and they’ve got a lot of Vanguard assets but they’ve also got a 401k at, let’s say, Fidelity, that they obviously can’t move. Perhaps they still work there and they can’t transition it. Will you factor that in, in terms of the overall asset allocation plan that you’ll put in place for the Vanguard assets?

Frank: We can take a big picture view and look across different asset and plan types, whether they’re held at Vanguard or held away, in thinking about the holistic recommendation we’re going to provide. But as you articulated there, we wouldn’t have the ability to actually manage that portfolio. We can help the client input those into the plan so they are aware of it and they can see it as part of the picture but they would have to continually manage those different components on their own.

Rob: So after someone calls up and goes through this process, do they actually get a written asset allocation plan—a result of the initial consultations and initial work?

Frank: That’s correct. They do receive the comprehensive financial plan and we try to frame things in a way that really speaks to the investor’s goals. For many of the individuals who enter into these advisor relationships, the main goal is retirement. But we can also provide information on other goals. For example, if it’s a college saving strategy or someone who wants to purchase a vacation home. When we provide that financial plan, it’s showing the asset allocation, outlooks of success, and the likelihood of being able to reach that goal. That becomes the foundation and the information we use to help the client monitor progress and performance over time.

Rob: Once an asset allocation plan is set and the client agrees with it— I take it the client can have all kinds of input into this, such as, “Well, you’ve recommended 70 percent stocks but I’d prefer 75.” I assume this is a dialogue between Vanguard and the client?

Frank: Yes. There is absolutely a give-and-take that takes place. In fact, this is a great aspect of the service in that while it has a great deal of sophisticated technology behind it, it’s really more than just an algorithm. This is an opportunity to work with a skilled, knowledgeable financial counselor to be able to make sure that we understand what your risk tolerance truly is and how things reflect on your goals and objectives. So it’s very much a partnership and a dialog and a conversation.

Rob: Do you typically implement the investment plan with mutual funds or ETFs? Or does it just vary depending on the circumstances?

Frank: It tends to vary. But presently, the majority we’re finding is Vanguard mutual funds. In fact, that’s the Vanguard Admiral share-class of mutual funds. It’s a low-fee retail class that has a roughly-weighted average of about 10 basis points. What we’re finding is that many of the initial investors in personal advisors are actually Vanguard clients. Many of them already hold Vanguard mutual funds.

Rob: Yeah.

Frank: While we see the mutual funds being used in the program, we certainly can accommodate the ETFs as well.

Rob: Once the plan is set up and the investments are transitioned if they need to be, Vanguard does the rebalancing?

Frank: That’s correct. We do ongoing rebalancing.

Rob: What exactly does that mean, ongoing?

Frank: We look at each individual’s portfolio… And they can get a real-time view every day through their personalized web experience too. But every 90 days we would look at the investor’s portfolio to see if they’ve moved out of the guardrails and thresholds that we had in place. And at that 90-day anniversary, for each client, we would make a determination systematically whether a rebalance is warranted to get them back to the proper strategic asset allocation. If that were the case, we would then move them back.

Rob: Has Vanguard published anything on exactly how they do that? What the guardrails are or how far off an asset class has to be before they rebalance?

Frank: We have that as part of our investment methodology and we would certainly be happy to provide that to you if you’d like.

Rob: I’m kind of a geek when it comes to rebalancing but I don’t know that we need to dive into the weeds. But that would be great. I could share it with the listeners. So, if someone signs up for this and moves forward, is there any commitment time-wise? Or can they leave the advisory services any time they want to?

Frank: They can leave whenever they want to. We hope to keep them well satisfied but there is certainly an opportunity to terminate the service if they choose to do so, for whatever reason.

Rob: And for those entering retirement, do you help them with distribution plans and required minimum distributions— which funds they should take from and how all that should work?

Frank: Absolutely. That’s a key part of the service as well. It’s interesting. I’d say that roughly two-thirds of our clients are coming to us in that 55 to 75-year-old age range. Using 65 as a proxy for retirement, we have many clients that are working with us to prepare for retirement and we have many clients in retirement. We can help work with them on those tax-efficient draw-down strategies and give them the assistance with things they need such as their annual RMD distribution.

Rob: Yeah, that’s a tough thing. In some ways, the investing part of it while you’re working is the easy part, although it doesn’t always seem that way. It’s taking the money out in a smart way that kind of gets challenging. Now, I’ve been with Vanguard forever and I should probably know this, but do you have a service— What if someone says, “I really like the idea of a financial plan and you sitting down with me and looking at my investments, making sure I have the investments in the right types of accounts and that sort of thing, but I’m not sure I’m ready for you guys to take over management of the investments yet.” Do you have some sort of financial planning service that you offer to those who don’t want investment advisory services?

Frank: I’d say, through the onboarding consultation process for our personal advisor, we’re effectively delivering the opportunity to have that type of consultation. And as we work through the creation of the financial plan, there really is no real commitment to sign up. You can still have that conversation and we hope investors will see the value as they work through it as we review the financial plan that we’ve created with their input. But if an investor’s not ready to move forward yet, there is no obligation to consent to the ongoing advice. They can get some value through those consultations and hopefully, when they’re ready and see the merits of the ongoing relationship and all they will get when they come on board whether it’s the ongoing access to the web tools or the ongoing relationship with the Vanguard financial advisor. But it’s certainly their choice when to move forward.

Rob: That’s great. I have one last question for you. You mentioned the $50,000 minimum and getting a dedicated financial advisor going forward at $500,000. Are there any other perks you get at other dollar amounts, whether it’s a million or five million? Are there any other things triggered when you get to those higher levels?

Frank: Well, I’d say that one thing is— and I’m not sure if I mentioned it in our conversation, but we have a 30 basis point flat fee for the service. So that would be something to keep in mind. The ongoing fee for the advisory service and basically for all of the access to the sophisticated technology and the financial planner would all be offered through the 30 basis points.

Rob: I guess we should mention the cost, shouldn’t we? Is that 30 basis points regardless of whether you’ve got $50,000 invested in the advisory services or $10 million? Is it still 30 basis points?

Frank: We do offer some different pricing differentials at significant asset levels. But for the sake of a personal advisor (the service that we’re talking about here) 30 basis points would be the price point for the majority of investors.

Rob: Okay. Well Frank, I really appreciate your time today. Are there any aspects of the personal advisory services we haven’t covered that people should know about?

Frank: I think we’ve generally covered the main features of the service. Again, I mentioned we have about 350 advisors at Vanguard. It’s a terrific team that’s well educated with the majority holding that financial planning designation. I think the value that comes from these individuals when you think about the current market conditions that we’ve been operating under which have been incredibly volatile, the behavioral coaching aspect that the advisor can provide is a real value add for the service. Again, I go back to the algorithms and formulas which are great, but it’s that personalized knowledge and awareness that the advisor can bring to the relationship. At times when people are maybe being tested a bit with fluctuating markets, the advisor can play a tremendous role and add great value to help someone stay the course and focus on the long-term and really go back to those assumptions we worked on together to create a long-term plan. Ultimately, through our research, we’ve shown the ability to stay the course can often be one of the biggest determinants for success going forward.

Rob: Yeah, and I imagine you guys were getting a lot of calls in January.

Frank: We got quite a few. That’s why we’re here. We love those calls because when markets are great, we all enjoy that. But the value of advisors really comes into play during periods like the ones we’ve just experienced.

Rob: Yeah. So, if someone wants to get started learning more, I can leave your phone number— Vanguard’s phone number in the show notes. I take it that’s the first step, just to give you guys a call?

Frank: Sure, that’s great. And they can do a little bit of research on Vanguard.com as well. They’ll be able to easily find information on personal advisor services.

Rob: Right, right. That’s great, Frank. I appreciate your time.

Frank: Thank you, Rob. I appreciated being here today.