Vanguard turns firepower on shake-up of financial advice market
Stephen Foley in New York
When Jack Bogle launched a low-fee mutual fund company in 1975, he took inspiration from HMS Vanguard, Admiral Horatio Nelson’s flagship at the battle of the Nile, for its name and logo.
Now, on the eve of its 40th anniversary, Vanguard’s growth has made it the equivalent of a flotilla of modern battleships, sailing into new territory and increasingly willing to flaunt its firepower.
However, it may start to attract some return fire. The company brought in more money in 2014 than any asset management group ever, and its chief executive Bill McNabb is embarking on an even more ambitious goal for 2015: revolutionising the market for giving financial advice, in the same way that Mr Bogle revolutionised the mutual fund industry decades ago.
Executives at Vanguard’s Valley Forge, Pennsylvania headquarters have been quietly working on a way to give simple but effective portfolio advice to US savers. It promises to offer the service at a fraction of the cost of the average financial adviser, 0.3 per cent of assets annually compared with an industry average of more than 1 per cent.
“Can we provide really super-high quality advice at a very low cost and do that in a very large way, and change that market? I think we can,” says Mr McNabb.
“We continue to think of our primary mission to reduce the complexity and cost of investing across the board.”
The open question is what the US’s 225,000-strong industry of financial advisers is going to think about Vanguard entering its territory.
And it is an important question, since a large part of the company’s recent growth has come from advisers putting their clients into Vanguard funds. The group passed the milestone of $3tn under management this summer, and it has accumulated a record $185bn in net new assets in the US alone since the start of the year. That surpasses the previous industry record of $141bn which it set in 2012.
Of that $185bn, $63.3bn was into exchange traded funds (ETFs) which, like most of Vanguard’s largest mutual funds, simply track stock market indices, and do not try to beat the market by picking individual securities like active fund managers do.
Few companies are so closely associated with the trend towards passive investing and the idea that low fees, more than stockpicking prowess, make the most difference to investment performance over time — a Bogle mantra since the very beginning. Vanguard still runs about $1tn in low-cost active funds, the investment decisions of which are outsourced to other groups such as Wellington Management Company, but this is down to about one-third of its business.
The record-breaking asset growth comes even though the company has not launched more than a handful of products, says Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ. “The shift to passive disproportionately helps Vanguard, and I believe we are still in the middle of that shift,” he said.
The company is forged in the image of Mr Bogle, pictured, and reflects his passion for naval history. Valley Forge does not have cafeterias, it has galleys; Vanguard staff are called “crew members”; its gym membership programme is called “Shipshape”.
It even has an unofficial fan club of “Bogleheads” who debate investment issues; this year, it claimed a new member, the guru of active managers, Warren Buffett, who said he had told his wife to put most of her money in a Vanguard stock market tracker fund after his death.
Because it is mutually owned by its funds, and does not need to turn a profit, Vanguard can lower fees more easily than rivals.
It also eschewed paying commission to financial advisers, something which initially limited the availability of its products, but which has become less of a problem. In fact, with more advisers switching from commissions to a fee-based model, they have become a significant distribution channel for Vanguard.
According to mutual fund research firm Morningstar, it is this adoption by financial advisers that has put the wind in Vanguard’s sails, even more than the dismal recent performance of active managers and of rival groups such as Pimco, which it overtook last year to become the second-largest asset management company, behind BlackRock.
It is expanding at a time of potential disruption. Brokerages are all pursuing their own technology platforms and entirely new companies, such as Betterment, have built savings apps designed to attract millennials.
But already some of the biggest independent financial advisers are chafing at the prospect of its entry into the market and raising the spectre of conflict of interest.
“Don’t be surprised if everything they recommend is a Vanguard product,” Peter Mallouk says he will be warning clients, whose own pitch is that he can tailor exactly the right mix of products for a saver’s needs. Mr Mallouk, based in Kansas City, has $4.3bn of client assets in Vanguard’s exchange-traded index tracker funds at the moment, but he is considering switching some of that now that fund fees are coming down across the board.
“While Vanguard was a pioneer and an early recipient of the benefits of the trend towards index funds,” Mr Mallouk says, “my company is engaging more with other fund managers, and if capitalism works there is going to be greater competition.”
BlackRock’s iShares ETFs are making inroads with retail investors and their advisers, according to Mr Rosenbluth of S&P Capital IQ, while State Street’s SPDR series of exchange traded funds is also competitive.
Yet for now, Vanguard sweeps all before it in terms of gathering assets, adding further benefits of scale it could use in the industry price wars Mr Bogle unleashed in the Seventies. Five of the 10 best performing US mutual funds, in terms of inflows year to date, are Vanguard funds, according to Morningstar, and Mr McNabb is pushing hard to export the business model to other countries. Vanguard’s non-US assets have doubled in six years.
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