(Updated September 2024. If you’re wondering about the future of Vanguard, take note that they have been actively tinkering with their robo-advisor service, Vanguard Digital Advisor Services (VDAS). In June 2024, VDAS added the ability to include a spouse/partner in your plan, such that the portfolio is managed on a household level. In August 2024, VDAS started using fractional shares to invest every last dollar. In September 2024, they lowered the minimum requirement to $100 (formerly $3,000). I decided to wade through the 119-page Client Relationship Summary and VDAS/VPAS Brochure & Supplement again for the third time and completely re-write this review.)
Here are my notes on the robo-advisor service Vanguard Digital Advisor, current as of September 2024:
What is Vanguard Digital Advisor Here’s what they say:
In our robo discretionary offers we provide online financial planning tools designed to help you create a goal-based financial plan, and the service will create an investment strategy aligned with your personal inputs. We’ll monitor your enrolled accounts frequently using an algorithm. We’ll have full investment discretion in order to transact as necessary to align your account(s) with your goal(s).
My interpretation is that they will manage a portfolio of Vanguard ETFs for you based on your inputs into their website. There is also online software to help you create a financial plan towards multiple goals (i.e. they tell you how much you need to save each month). With VDAS, you don’t get access to a human advisor.
Types of Vanguard accounts available to be managed. VDAS can manage Vanguard 401(k) and the following retail accounts held at Vanguard Brokerage, (although you may need to sell your existing investments). They will consider all of the accounts together for purposes of tax-efficient asset location.
- Individual or joint tenants with rights of survivorship (JTWROS) taxable accounts.
- Traditional IRAs.
- Roth IRAs.
- Rollover IRAs.
- Inherited IRAs owned by natural, adult investors.
- Single-participant SEP-IRAs.
Their wording suggests that Vanguard will let you link other ineligible Vanguard account and external non-Vanguard account balances and include them into your long-term goal projections, but they won’t analyze their asset allocation and adjust your Vanguard asset allocation in response.
Existing outside portfolio? You will likely need to sell your existing investments if you want them to manage that money. VDAS wants a clean slate. They say they will analyze your existing holdings, including how much capital gains you have built up, and either recommend that you don’t sell them (but not enroll in VDAS), or sell them and enroll in VDAS where they will re-invest your funds for you.
Factors used to personalize your portfolio. The #1 competition for this product is probably Vanguard’s own series of Target Retirement Funds. Those are based on a goal retirement year, in 5 years increments, and now only cost 0.08% all-in for younger investors. So if you’re 25 years old, you basically have maybe 4-6 possible glide paths available.
In contrast, VDAS says they have “over 300 personalized glide paths” available. Here are the factors that they consider, based on their documentation:
- Taxable income/salary
- Anticipated spending needs
- Current savings/savings rate
- Risk attitude (Very Conservative, Conservative, Moderate, Aggressive and Very Aggressive)
- Current age
- Marital/partner status
- Expected retirement age
- Significant single-stock exposure
To be honest, I’m not sure how many users will end up with a vastly different glide path than one of the Target Retirement funds, especially considering they will most likely be constructed with the same four underlying ETFs that underpin them (more on that later). But if you have a unique situation, this personalization could be attractive.
Now available in 100% index, index/active mix, and ESG flavors. In addition to the original all-index portfolio, you can now also chose a (slightly more expensive) option that includes some actively-managed Vanguard funds or an all-index portfolio that has an environmental, social, and governance (“ESG”) filter.
But for most people picking the traditional 100% index option, your portfolio will consist of the “Four Totals”:
- Vanguard Total Stock Market ETF (VTI)
- Vanguard Total International Stock Market ETF (VXUS)
- Vanguard Total Bond Market ETF (BND)
- Vanguard Total International Bond ETF (BNDX)
As noted, these ETFs are simply different share classes of the exact same funds that underpin the Vanguard Target Retirement Funds.
Pricing and fees. How much does VDAS cost? VDAS has an all-in cost of 0.20% of assets managed annually for their all-index option, but that includes the cost of underlying ETFs. (I’m focusing on the all-index option here, there is a 0.25% all-in cost on their active/index mix option.) Your portfolio of ETFs will probably have their own expense ratio of ~0.05%, so the cost of VDAS itself will effectively be ~0.15%. That works out to $15 a year for every $10,000 invested.
In comparison, Vanguard Target Retirement Funds as of September 2024 have average expense ratios of only 0.08% all-in. The Vanguard Target Retirement Funds got a lot cheaper when finally switched to holidng Institutional shares of their underlying component funds instead of the most-expensive Investor shares. I thought that the gap between the costs would only narrow over time, but they kept the cost of VDAS the same for a gap of 0.12%.
As DIY person, I would remind folks that you can always buy the exact same four ETF building blocks at any low-cost broker (including Vanguard itself). That would make your all-in cost just the ~0.05%. However, DIY investors won’t have automatic rebalancing or automatic tax-loss harvesting.
If you have over $50,000 in assets, you can “upgrade” to Vanguard Personal Advisor Services (VPAS) where you can talk to humans for a higher all-in cost of 0.35% for the all-index option. However, I’m really not sure what actually VPAS has to offer beyond a human voice because they don’t appear to guarantee well-informed advice from a Certified Financial Planner or anything. Essentially, you seem to get some additional hand-holding from a rep who is familiar with the software.
If you have over $500,000 in assets, you can upgrade again to Personal Advisor Select, which does include a dedicated CFP. This costs a flat advisory fee of 0.30% annually (on top of the expense ratio from investments). This might actually be worth the upgrade for those that start with VDAS but over time their financial situation becomes more complicated.
Automated rebalancing: VDAS will check daily and rebalance within 5% bands. Rebalancing will be done in a tax-sensitive manner. Here’s the official text:
On each day that the markets are open for trading, we will typically look to assess Portfolios for whether a rebalancing opportunity exists consistent with our investment strategy and the following criteria (“Rebalance”). Under normal circumstances, if any asset class (stocks, bonds, or cash) is off the target asset allocation by more than 5%, the Portfolio will be rebalanced to its target allocations (asset and sub?asset) or, in the future, within allowable guardrails pending embedded tax cost.
I believe that automated rebalancing is an important and sometime under-appreciated benefit of a managed portfolio over a DIY portfolio. Us DIY folks all think we’ll rebalance the same way without emotion, but sometimes… in times of stress… we don’t. It’s hard to assess the benefit in terms of excess performance, because you are really adjusting risk and any “rebalancing bonus” tends to come and go depending on the historical period.
Automated tax loss harvesting (TLH). VDAS includes tax-loss harvesting on taxable brokerage accounts. This is the practice of selling equity ETFs at a loss to “harvest” them and replacing them with similar securities to maintain market exposure. If done correctly, this can improve your after-tax return. They will now consider the tax effects across an entire household (when filing joint tax returns). Here is their language:
The Services offer a tax loss harvesting service (“TLH Service”) election for taxable individual and joint brokerage accounts. TLH involves selling a security at a loss and purchasing another security to maintain your asset allocation. Depending on your personal circumstances, a TLH strategy can add value in the form of reduced taxes when harvested losses are used to lower your tax bill and potentially grow your savings if you are able to reinvest those tax savings. For Enhanced Households the TLH Service applies to all eligible Enrolled Accounts in the Portfolio.
From their other documents, Vanguard performs their TLH using only other Vanguard ETFs as the “surrogate” ETF pair to claim the loss but also avoid wash sale rules.
The actual benefit of tax-loss harvesting can vary widely based on individual factors. Most importantly, how much of your portfolio is actually in taxable accounts, and how much of that is stocks? Not to mention, TLH can actually lower your return in certain situations by deferring the tax bill to a future period when your tax rate is higher. This is complicated topic with no single answer. TLH could be a net positive, though, that helps offset the VDAS fee and maybe even then some.
Multiple goal support. VDAS now supports multiple goals in its software. For example, you might have a house downpayment as a short-term goal and retirement as a long-term goal.
Fractional shares of ETFs now included. This is a new feature that they basically had to add if since they wanted to lower the minimum balance to $100. Otherwise, there would be no point as VTI is over $250 for a single share.
My take. Vanguard is obviously focusing a good deal of their energy on Digital Advisor, and I think this is probably a smart move for them. The Vanguard ETFs themselves continue to be well-run and cheap, but I believe their “at-cost” structure has incentivized Vanguard to minimize customer service costs at their in-house brokerage and instead quietly push folks to hold Vanguard ETFs at outside brokers (it’s cheaper for them this way). However, Digital Advisor allows them to charge another layer of fees for management services, hopefully justifying and paying for better service for those customers. If they can keep improving this product technology while also lowering the price as it scales, I believe it can grow in popularity.
