Vanguard Gets Personal

The fund giant is shifting its strategy as customers demand more hand-holding

Fifteen years ago, Vanguard Chief John J. Brennan opened a letter from his dad, a newly retired bank executive. Enclosed was a check from his father's retirement account, along with a note that read simply: "Jack -- Do something with this." Of course Brennan, then a senior executive at the mutual fund giant, was able to help. But, he remembers thinking, who was helping his father's friends and neighbors with such matters?

After years of catering to the do-it-yourselfers, Vanguard Group Inc. wants to be the one that answers those tricky questions for its clients. Brennan, who goes by Jack, is leading a quiet but significant adjustment in course at the fund company, which boasts $885 billion in assets. The Malvern (Pa.) outfit is developing a series of services, including new financial-planning programs for its retail customers, low-cost management services for participants in its 401(k) business, and offerings to help retiring boomers manage their accumulated wealth.

That's not all. Vanguard -- known under founder John C. Bogle for taking regular jabs at the brokerage industry -- is targeting those who hand their money off to brokers and financial planners by setting up a sales unit aimed in large part at peddling its fledgling exchange-traded funds, or ETFs. "Increasingly, people want advice, counsel, and hand-holding," says Burton J. Greenwald, president of mutual fund consulting firm BJ Greenwald Associates. "And traditionally, that has been anathema to Vanguard."

The 51-year-old Brennan insists Vanguard won't stray from its roots. "We are not going to open [retail] offices; we are not going to walk your dog," says Brennan."Clients are saying, 'I just want you to help me a little more."'


There is clearly a shift afoot in the fund business. The share of mutual fund assets that were held directly by retail investors dropped from 25% in 1998 to 19% last year, according to Boston-based Financial Research Corp., which tracks the fund business. The other 81% are held through financial advisers or institutions, including 401(k) programs. Certainly, that change hasn't yet hurt Vanguard: The company pulled in $25 billion in the first seven months of the year, second only to American Funds. Still, experts such as Greenwald note that investors are demanding more guidance, and Vanguard must address that need.

The company's most notable response is its effort to court brokers and financial planners. F. William McNabb III, managing director of the client-relationship group, created a new team of about 50 people 18 months ago to market Vanguard products directly to brokers and other financial advisers. The company also revamped its professionals' Web site earlier this year. Still, Vanguard is not as plugged into the brokerage firms as rivals Fidelity Investments and American Funds. And many firms, notably Charles Schwab (SCH ), Fidelity Brokerage, and Ameritrade (AMTD ), are already well connected with independent advisers.

Yet Brennan argues that advisers are receptive to Vanguard's pitch. For one thing, more planners and brokers are moving toward fee-based compensation arrangements and away from commissions. That's why Brennan believes Vanguard's no-load, low-expense funds will be welcomed by fee-based advisers.

The focus on advisers also reflects Vanguard's need to play catch-up in the fast-growing exchange-traded fund (ETF) market. ETFs are index funds that are bought and sold on an exchange. It's an area that index giant Vanguard can hardly afford to cede: For the first eight months of 2005, ETFs accounted for 23% of equity fund flows, up from about 19% for the same period last year, according to AMG Data Services Inc. But Vanguard was late to market. Barclays' (BCS ) ETFs, known as iShares, have some 85% of the market, says AMG, vs. a 6% share for Vanguard's ETFs, called VIPERs.

Closing that gap won't be easy. One broker, who declined to be named, says some of his colleagues are unenthusiastic about Vanguard's pitch, considering the company bad-mouthed the brokerage community for years. And Vanguard stopped providing back-office services to planners in 2003 -- a move that irked some of them. Vanguard execs acknowledge some planners and brokers may have been upset by past practices. But in general, they say, the company has strong ties in the adviser world.

In fact, Vanguard's efforts are starting to have an impact. Sheryl Garrett, who runs Garrett Planning Network Inc., an affiliation of 250 fee-only planners, says that until recently she has coached her advisers to use Barclays' iShares because they have a wider variety of funds. But after a visit from a Vanguard representative, she now encourages them to consider VIPERs more, in part because they have lower fees.

If Vanguard has a long way to go in courting the brokers, it is also still finding its way in providing advice to its own retail clients. Nine years ago, Vanguard rolled out its personal financial-planning service, wherein customers pay a fee of $1,500 or less -- depending on the assets they have with the company -- for a one-time financial evaluation that includes everything from insurance coverage to retirement planning to college savings plans. But it's labor intensive and more detailed than some clients like. No surprise, then, that the company with more than 5 million retail investors only does 1,000 or so such plans a month. That's why it hopes to roll out a version of the service in early 2006 that will be less costly to offer and simpler for customers.


Vanguard is better positioned to sell advice to 401(k) customers. Just over one-quarter of Vanguard's assets are linked to these retirement plans. While the company launched a service five years ago with financial-technology firm Financial Engines Inc. that helps participants manage their retirement assets online, only about 8% of 401(k) investors regularly use it. So Vanguard is rolling out a program under which the fund company will manage and rebalance an employee's 401(k) account over time. The Vanguard program will charge only 10 to 40 basis points, or 0.1% to 0.4% of assets. Many competing services come with higher price tags, including an offering from Fidelity that can run as high as 65 basis points. That's why Fred Barstein, president and CEO of consulting firm Inc., believes "Vanguard is in an extremely strong position."

Even so, the advisory business is not totally price-driven. To succeed, Vanguard has to deliver premium advice at the cut-rate prices customers expect.

By Amy Barrett in Malvern, Pa.

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