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Vanguard Group Inc. last year introduced a breakthrough product that slashed the cost of a simple buy-and-hold balanced portfolio to a new low in Canada. Now, the exchange-traded fund giant is preparing for its next disruption: the cost of advice.

Known as asset allocation exchange-traded funds, the Vanguard product provides investors with various mixes of stocks and bonds in a single fund that automatically rebalances with annual management fees of 0.22 per cent – a fraction of a typical mutual fund fee. Vanguard has recently added two more funds to its lineup to include an all-equity balanced ETF and an income product.

In just over a year, the funds – there are now five – have brought in more than $1.1-billion in assets, gaining almost instant popularity with both retail investors and advisers. Competitors BMO Global Asset Management and Horizons ETFs Management (Canada) Inc. soon launched similar products.

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“We have been really pleased with the price competition we have introduced in the mutual fund sphere. We liked that we have had that much of an impact,” Tim Buckley, chief executive officer with Vanguard, said in a recent interview with The Globe and Mail.

"But the area that really needs to come down [in price] is in advice.”

One way to accomplish that is for Vanguard to expand its low-cost, automated asset rebalancing offerings to include its own robo-adviser service. Robo-advisers are web-based platforms that offer clients an online risk-assessment tool that calculates an appropriate asset allocation based on age, financial goals and risk tolerance. They provide clients with a recommended investment portfolio predominantly made up of ETFs – all for much lower fees than usually offered by traditional financial advisers.

In the United States, Vanguard already runs one of the country’s largest robo-adviser platforms, with more than US$115-billion in assets under management. The platform was introduced in 2015 and manages retail accounts for only 0.30 per cent. In 2017, Vanguard launched a similar digital offering in the British market, managing £1-billion ($1.76-billion) in assets for retail investors.

Last December, The Globe reported Vanguard was in the planning phases of launching a robo-adviser in Canada. While the project is continuing, Mr. Buckley says the “potential” Canadian offering would not necessarily be a duplicate of what it already offers in the U.S. and British markets.

"We have discussed a [direct-to-investor platform] because that is our origin, but it’s not in the current plan for the Canadian market,” Mr. Buckley added.

But that could still mean Vanguard may launch a robo-adviser service specifically targeted toward advisers. Such a service could hold an assortment of any of Vanguard’s hundreds of individual ETFs, freeing up the time that advisers would normally spend on buying and selling investments for other advice services, such as wills and estate planning, insurance needs and tax management. Vanguard would not provide further details on what kind of robo-adviser it would launch in Canada.

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Vanguard already has deep ties to the Canadian adviser community, predominately selling its ETFs and mutual funds through those channels.

“If we can keep pushing fees lower, investors get to keep more of their returns,” Mr. Buckley said. He added that advisers need to spend less time crunching numbers and constructing portfolios and have more face time with clients. As things become more automated, the price of advice will come down, he said.

The cost of advice has been under regulatory scrutiny in Canada. The Canadian Securities Administrators, an umbrella group of provincial and territorial securities regulators, now require all Canadian financial firms to provide annual statements that disclose how much an investor pays for financial advice in dollar amounts.

Canadians who use a traditional financial adviser typically pay advice fees between 2 per cent to 2.5 per cent (which includes investment management fees). For those who use fee-based advisers, the price is approximately 1 per cent of an investor’s assets (plus the costs of owning funds).

Some experts believe Vanguard has the power to disrupt the cost of advice given its track record of lowering the cost of mutual funds. In industry parlance, it’s known as “the Vanguard effect." Eric Balchunas, senior ETF analyst for Bloomberg in the United States, likened the price pressure from Vanguard to a “Category 5” hurricane for advisers who continue to charge high fees.

“Vanguard is known to inspire people to lower their fees .... The price pressure is real among advisers but it’s still early days," Mr. Balchunas said.

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Despite Vanguard’s track record in lowering the cost of mutual funds, some observers remain skeptical the investment giant will be as successful at lowering the cost of advice.

“Many of these options are still in their infancy,” said Josh Book, CEO and founder of Parameter Insights Inc., a financial-services research and consulting firm. "The jury is still out on whether these tools will translate into reduced adviser fees for clients.”

How a big deal in the ETF industry could mean better returns and lower fees for investors

Three top REIT ETFs for Canadians - and the one I like the most

Vanguard, iShares or BMO? A side-by-side comparison of the new all-in-one diversified ETF portfolios

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