Bankrate senior reporter James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more.
- Newer investors
- Vanguard investors
- Investors focused on low costs
Vanguard Digital Advisor is a newer robo-advisor from the company that pioneered low-cost investing in funds, and it brings that experience to its offering. Don’t confuse Digital Advisor with Vanguard’s similarly named Personal Advisor, which charges a higher fee and requires a much-steeper account minimum. Still, Digital Advisor gets the job done with a stripped-down service that offers the basics – portfolio management, rebalancing and other planning tools – all at a low price.
While Digital Advisor scores high marks for low costs and its focus on educating its clients, it may be a little too stripped down — not offering some of the features (tax-loss harvesting) that investors have come to expect in the sector.
Vanguard Digital Advisor at a glance
- Cost: 5 of 5
- Investments and Portfolios: 3 of 5
- Account Types: 3 of 5
- Features and Tools: 4.5 of 5
- Customer Experience: 4 of 5
Account Minimum: $3,000
Management Fee: About 0.15 percent of assets annually
Portfolio Mix: Built with four Vanguard ETFs
Fund Expense Ratio: About 0.05 percent
Account Types: Individual taxable, Roth IRA, traditional IRA, rollover IRAs and eligible 401K plans
Cash Management Account: No
Customer service: Phone Monday to Friday 8 a.m. - 8 p.m. ET; email support
Tax Strategy: Optimizing asset location, minimizing taxes on sale
Tools: Vanguard calculators, videos and articles, debt payoff tool
Pros: Where Vanguard Digital Advisor stands out
You’ve come to expect low costs from Vanguard, and the company delivers on that promise with its new robo-advisor, whether it’s the management fee or the costs of the ETFs it invests in.
Vanguard uses a bit of a different pricing structure from many robo-advisors, which add a management fee on top of the ETFs. In contrast, Vanguard targets an all-in fee of 0.20 percent, which effectively includes the prices of the ETFs, which themselves already charge very low fees. That means all-in you’d pay a very competitive $20 each year for every $10,000 invested.
Naturally, Vanguard Digital Advisor uses its in-house ETFs. That’s not surprising since a huge portion of the robo-advisor industry turns to the company’s funds as primary ETFs. In total, you’ll pay about 0.05 percent for your funds, about as low as it goes, with the expense ratio on the funds ranging from 0.03 percent to 0.08 percent. But unlike other robos that add the costs of ETFs to the management fee, all costs here are included in the all-in fee.
For example, robo-advisors such as Betterment and Wealthfront charge 0.25 percent as a management fee and then have another 0.08 to 0.10 percent in ETF fees. To be fair, those ETF fees don’t go to the robo-advisor but to the fund company itself (which often is actually Vanguard.)
That said, recommending its own funds is an inherent conflict of interest, though Vanguard’s consistently low expenses make this a less pressing concern than it could otherwise be.
If there’s a downside, it’s that Vanguard’s portfolio mix is surprisingly thin (more below).
Smooth sign-up process
Vanguard’s sign-up process feels among the most developed and sophisticated. The automated process is smooth and asks detailed financial questions such as your current spending, so you may want to come prepared with at least some of your info. This process may take longer than the sign-up at other robos, but it’s capturing important data to better shape an informed decision.
Vanguard’s sign-up also takes you through detailed financial scenarios where it assesses your risk tolerance. It asks questions such as “Would you risk $1 to make $4 in the next year?” Based on this analysis, it comes up with your risk tolerance and then builds a glide path for you, showing your allocation to stocks and bonds as you age.
The robo-advisor works from a Vanguard brokerage account, so you’ll need to have one to use Digital Advisor. When you’ve completed your assessment, you’re automatically taken to the brokerage to sign up for an account there, if you don’t already have one.
You’ll need at least $3,000 in the Vanguard account to use Digital Advisor. That’s not a lot in the big picture, but much more than the zero that many robo-advisors allow you to start off with.
Education and tools
Vanguard was built on the ethos of helping individual investors, and you see that across the site — from educational videos, articles and more — to help you make smart long-term decisions.
In practical terms, that means you’ll have access to all Vanguard’s retirement-planning tools and calculators. You can import your accounts into your profile so that the robo-advisor can have a more comprehensive view of your finances. Then you can develop a more accurate plan, for example, through Vanguard’s debt-payoff tool, which helps you build a payoff plan for liabilities.
Cons: Where Vanguard Digital Advisor could improve
Limited portfolio mix
Unlike many robo-advisors, which may construct portfolios with ETFs representing more than 20 different asset classes, Vanguard constructs all its portfolios with just four ETFs:
- Vanguard Total Stock Market
- Vanguard Total International Stock
- Vanguard Total Bond Market
- Vanguard Total International Bond
Vanguard drastically simplifies the portfolio management process, which may not be the worst thing, given so much unnecessary complexity and deliberate misdirection in the financial world. But it’s hard not to think that the portfolio could be more diversified across asset classes such as real estate, commodities or others.
Limited account types
For now Vanguard has a limited selection of account types that are available on its Digital Advisor account: individual taxable accounts, as well as IRAs (Roth, traditional and rollover).
That’s less than typical robo-advisors offer, though Vanguard may expand this offering.
However, Vanguard offers something that other robo-advisors really don’t touch: You may be able to have your employer-sponsored 401(k) managed, if you hold it at Vanguard. Not all 401(k) accounts will be eligible, and your company must have authorized the program. A 401(k) account may also be invested in a wider variety of ETFs not offered in the standard account.
No tax-loss harvesting feature
Vanguard doesn’t offer automatic tax-loss harvesting services for its account, when it’s something of a standard in the industry. That’s not to say Vanguard does nothing to minimize taxes. In fact, it optimizes your taxes and considers the tax impact of all portfolio decisions.
Vanguard factors your cost basis in any decisions to sell or rebalance your portfolio and sells off pieces that create the least negative impact on your taxes – similar to what Ellevest offers.
And if you have both taxable and tax-advantaged accounts with Vanguard, the robo-advisor will try to optimize the placement of assets within those portfolios to minimize taxes. For example, more highly taxable assets could go into tax-advantaged accounts such as an IRA, while those with a lower potential tax impact would go into a taxable account.
No cash management account
A cash management account is something of a standard feature on a robo-advisor account these days, and the best of them – those by Betterment and Wealthfront – offer all the convenience of a checking and savings account and other added features, too. Unfortunately, Vanguard’s robo offering doesn’t provide a cash management account, though idle cash is swept into an interest-bearing fund containing U.S. government bonds.
You can’t purchase fractional shares
Vanguard doesn’t purchase shares in its funds in fractions, so you’ll end up with only whole shares in your account. That won’t mean much as your account really grows, but as you get started, it could mean that your portfolio is not as diversified as your target allocation says it should be. In addition, it means less of your money is being put to work where it should be.
For now, Vanguard Digital Advisor is still something of a work in progress, having launched in the middle of 2020. It makes a better pick for newer investors and those who have a Vanguard account already and simply want Vanguard’s robo-advisor to run the show at a modest cost. Low cost is one of the best reasons to turn to this Vanguard offering, given the lack of other standard robo-advisor features such as a cash management account or tax-loss harvesting.
Those looking for another low-cost option with strong street cred might turn to Schwab Intelligent Portfolios, which doesn’t charge a management fee and uses Vanguard funds, too. Other feature-rich picks include Betterment and Wealthfront, both independent robo-advisors.
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