In the absence of standardization, how do you know if your managed account is doing any good?

Two examples come to mind where standardization has been a welcome exception: (1) Apple products (and even they've changed their chargers a few times over the last 15 years) and (2) mutual fund performance.

What do mutual funds have going for them? Off the top of my head, relevant regulation dating back over 90 years, a century of history and experience, and, probably most importantly, a very clear definition of success: Did the fund outperform its benchmark and peers over the long term? Check!

From a standardization perspective, compared with that of mutual funds, the oversight of managed accounts is in a very different place. Not only have they not been around as long as mutual funds, but they’ve also changed quite a bit over the last decade or so.

When managed accounts were primarily a portfolio construction and rebalancing service, it made sense to focus oversight efforts on the composition and performance of the portfolios. But managed accounts have evolved to tackle broader aspects of financial well-being and to deliver value across four major pillars: portfolio, financial, emotional, and time.¹ These pillars of value encompass everything from tax-efficient asset location, to the decision about when to claim Social Security, to email and web-based nudges encouraging participants to take positive actions.

Considering this evolution of managed accounts, shouldn’t the way we measure success for advice change along with them?

My Vanguard colleagues and I have been discussing this topic a lot lately with plan sponsors and with leading consultants responsible for helping our shared clients fulfill their fiduciary duty to provide oversight of advice services offered to participants. How do I think the industry is doing at establishing standards for managed accounts? I’ll put it this way: If we were electronics chargers, we’d be making a gnarly pile on my kitchen counter.

Don’t get me wrong—there is solid work being done at Vanguard and across the industry, including thoughtful research, commendable efforts to broaden the discussion beyond just managed account performance, and insightful analysis.² For example, from our recent data on Vanguard’s proprietary advice services, we know that 77% of Digital Advisor and 87% of Personal Advisor enrollees are well funded and on track with their retirement goals.³ We also determined that the average advised investor is nearly one and a half times more likely than a target-date fund investor to increase their deferral rate in 2022.⁴

We’re getting there, but we, as an industry, still have more work to do to help fiduciaries confidently answer the questions, “Is my advice program adding value for my participants?" and “How does ours compare with other available programs?"

Within Vanguard’s walls, we’re not at the end of the process, but we’re also not at the beginning. For the plans using our advice services, we have a solid infrastructure of reporting that helps fiduciaries fulfill their oversight responsibilities, addressing questions around service usage, participant personalization, portfolio design, and participant progress toward their retirement goals.

But the hard, and really important, questions mentioned above about the value of advice? Stay tuned we’ll have more to share soon. We’ve assembled the experts from across Vanguard’s research teams and advice businesses (they’ve even let the Advice Guy be part of the effort!) and are coalescing around a framework that will help us evolve our current reporting and become a foundation for how we articulate the value of advice both internally and externally. And apologies if this sounds egotistical, but maybe this framework will be so compelling that others in the industry will follow suit!

In the meantime, here’s a sneak peek of the team’s early thoughts, with the main categories we’re considering and some of the questions we would seek to answer within each:

• Participant engagement: How many participants are enrolled, and how often are they engaging with the service post-enrollment? How is their usage changing over time? 
• Investor behavior: To what extent, and to what depth, are participants personalized? What tools and features are they using?
• Portfolio construction: How are participants invested relative to a target-date fund? How do their portfolios reflect the personalization they’ve completed? 
• Financial outcomes: Is performance reasonable and competitive, especially on a risk-adjusted basis? Are participants saving appropriately, and are they on track to achieve their financial goals?

In summary, unlike with mutual funds, where performance is really the star of the show, we know that the evaluation of managed accounts requires more of an ensemble cast. One of our most engaged plan sponsors recently suggested to me that it’s a process of triangulation bringing together multiple data sources to strengthen our insights and findings. I love the sentiment and wonder if it may even end up being a process of rectangulation (Believe it or not, that’s actually a word!).

¹ Stephen Weber, Paulo Costa, Bryan Hassett, Sachin Padmawar, and Georgina Yarwood. The Value of Personalized Advice. Vanguard, 2022.

² For example, see Kimberly Stockton, Jeffrey Seegers, and Vivien Chen. Target-Date Strategies and Advice. Vanguard, 2024.

³ As of January 2024. Percentages are of fully personalized enrollees.

⁴ Jeff Clark. How Americans Use Professionally Managed Allocations. Vanguard, 2023.

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