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Advisors Should Expect to Work Hard to Justify Client Fees – Vanguard’s McNabb

The advisor’s relationship with clients is changing, whether because of new Department of Labor fiduciary regulations, new technology or other reasons, and it’s likely that advisors may have to work harder to justify the fees they charge, Vanguard CEO William McNabb said at the Morningstar Investment Conference this week.

“I think one of two things will happen. I think there’s a high probability of fees going lower or you’ll be asked to do a lot more for what you charge. That’s inevitable,” McNabb said.

He said on the product side, there has been an incredible compression on fees, especially as low-cost and passive strategies have been popular and will likely remain that way. Vanguard is already the low-cost leader in mutual funds, and McNabb said they are likely to cut fees again. They can do that because of economies of scale, he said.

He said they haven’t even cut fees as much as they could have because they invested in technology. The decision to cut fees or put money toward technology is weighed by the impact it may have to existing clients in the long run.

“If we can enhance service and create further economies of scale, then investment is worth making," he said. "In the last five years we could have accelerated that even quicker, but we have invested in the future. The good news now is, we think there is a lot more room to go (on fee cuts); we’re not done.”

While product fees are falling, product distribution and advice have not seen much fee pressure, but he said that will eventually change, given the size of the industry.

Not only is there competition coming from robo advisors, but with equity returns likely to be much lower in the next 10 years, if not longer, that could force advisors to change what fees they charge clients. And advisors need to be up front with clients that returns could be lower. 

“Being very clear that this is the likely scenario we’re living with in the next decade is a huge service (to clients),” he said.

Clients who have memories of outsized returns, like what was seen in the 1990s, need to be told those won’t return anytime soon.

“That has profound implications for those in the accumulation mode. It’s hard to get your hands around that. Have them (try to) move their saving rates up,” he said.

Technology will continue to become an important part of an advisor’s business, and McNabb sees it moving from PC-based computing to mobile. He said Vanguard spent some time in Silicon Valley learning about new technology development to get a sense of where research is headed, adding that “it’s very different from the way we developed technology—and we’re good at it. When we spent time with firms, we had our eyes opened.”

He said in the next few years, advisors must be able to interact with clients in a way that’s different than they do today, and there’s going to be an expectation that technology will be part of it, but clients won’t pay more for it.

“The advent of how personal technology evolves, the best advisors use to their advantage. Like Siri, … people use it periodically, but five years from now, everyone will have a personal digital assistant. If you’re a personal advisor and you won’t make your content available through it, you will struggle,” he said.

Automated advice will take a bigger share of wealth management and asset management over time, but how much is unclear. Still, he said, it’s unlikely to be predominantly the way people work.

“The most important message is rather than push back on the technology, find ways to embrace and leverage it to benefit yourself. Learn as much as you can from what firms are doing. I think the hybrid model will be the winner where you combine great technology with great advice,” he said.

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