This week Vanguard launched its long-awaited direct-to-consumer proposition, offering low-cost access to Vanguard funds. Hargreaves Lansdown’s share price fell by a hefty 8% on the day, fuelled by fears of a price war.
I’ll use this week’s email to share our views of Vanguard’s proposition and the impact it might have.
Vanguard’s proposition
Vanguard’s headline account fee is low at 0.15%. We did some analysis for the launch of the proposition and calculated that the OCF of a £10k investment in the Vanguard FTSE UK All Share Index Unit Trust is 0.23% directly with Vanguard, compared with an average of 0.50% across platforms. These are wide divergences. But it is important to note that Vanguard hasn’t launched a fully-fledged platform at least for now; the proposition only offers access to Vanguard funds and there’s no pension component just yet.
Cost is important and on a lump sum £10k investment, the investor will save £26.58 in the first year. But cost is only part of the story. I opened an account on Vanguard a couple of weeks ago (during the friends and family trial period) to test the system for our research. The process took all of three minutes – and two minutes of that time was spent on fund selection.
That is a step change for customer experience. I tried to open a similar account with another D2C provider last year and was asked to mail a paper copy of my passport: with friction comes abandonment.
Importance of brand
In our twice-yearly surveys of active private investors (with Glazier Consulting), we measure prompted brand awareness of direct-to-consumer propositions. We are waiting for the results from our latest round, but at the end of last year Vanguard had prompted brand awareness of 15%. That’s pretty good for a recent entrant to the UK market that until last week had not promoted a D2C offering to investors.
But let’s put that into context – this is still much less than giants like J.P. Morgan Asset Management and Prudential, each of whom enjoy 63% prompted brand awareness and Hargreaves Lansdown with 57%. J.P. Morgan has turned away from promoting a direct offering, in part due to the cost of customer acquisition being too high. If a heavyweight household name like J.P. Morgan finds customer acquisition expensive – how will Vanguard compete?
However brand recognition only takes a fund so far. Our investor research published in January reveals that “a competitive price” has overtaken “a well-known and trustworthy household name” as the most important criterion in selecting a direct platform. Of course if the banks could get their act together, they should have all the ingredients for success in the market. Which is why we are watching Barclays closely.
The upshot is that Vanguard will certainly get traction in the market although they aren’t going to eat Hargreaves Lansdown’s lunch – at least not yet! But Vanguard isn’t in a hurry – they have said it is a proposition for “generations to come”.
Hargreaves Lansdown welcomes the competition
The FT reported yesterday that Chris Hill, the CEO of Hargreaves Lansdown chirped that he “welcomed the competition” – and we think he should. Competition is good: it will bring more customers to the market. But the analysts are right too – this will exert additional price pressure.
Hargreaves Lansdown’s data, released yesterday, suggest that their platform assets continue to grow at an annual rate of over 20%. Platforum analysis shows that Hargreaves Lansdown captures more than one-third of the market share of D2C platform assets.
Yet less than a quarter of British adults have risk-based investments outside of the workplace. So there is plenty of room for another player to attract new customers to investing. Platforms regularly tell us that their biggest source of new customers is transfers in from other platforms. Customer acquisition is hard and expensive.
If Vanguard can attract a new set of investors, that will be good for the entire industry – advised and direct-to-consumer.
You can hear Rob Fisher, Head of Retail Growth for Vanguard Europe, at our D2C and Digital conference on 29th June. You can register here or email Bruce Allmand-Smith.