Vanguard Sways Financial Advisers to Bring $1 Trillion on Boardby
Passive funds, ETFs drive fee-based advisers to fund giant
BlackRock, Schwab cut fund expenses in quest for market share
Financial advisers who once shunned Vanguard Group because it didn’t pay commissions are now among the fund giant’s best customers.
Money from brokers and independent advisers accounted for about 50 percent of the $225 billion Vanguard has brought in this year, topping cash from individuals or retirement plans, according to company data. While Vanguard is often associated with mom-and-pop investors and 401(k) accounts, this group of professionals now accounts for about a third, or $1.3 trillion, of the firm’s assets. That’s as big as its individual investor business, the traditional leader.
The wave of investments comes as several forces are shifting the mutual fund industry, making it more competitive. Customers have become more aware of fees. Wealth managers are under scrutiny over how they’re paid. And the low-cost, passively managed index and exchange-traded funds Vanguard pioneered have generally outperformed actively managed, more expensive counterparts.
“Advisers are looking to get the right asset classes and trying to get it at a low cost,” Vanguard Chief Executive Officer Bill McNabb said in an Oct. 18 interview with Erik Schatzker on Bloomberg Television. “You have got to think this is more than a cyclical thing.”
Vanguard’s success in attracting money from advisers with its low-cost approach is facing increasing challenges. Earlier this month, BlackRock Inc. cut prices on 15 ETFs aimed at buy-and-hold investors and two days later Charles Schwab Corp. slashed fees on five ETFs. In many investment categories, Schwab is now cheaper than Vanguard. Schwab’s mid-cap ETF charges six basis points, while its rival’s costs eight basis points.
That strategy puts pressure on companies’ bottom lines. On Oct. 18, BlackRock reported revenue fell 3 percent in the third quarter from a year earlier even though assets under management surged to $5.1 trillion, a 14 percent jump.
Advisers are a sales target for mutual fund providers because they control an estimated $19 trillion, according to a May report from Aite Group, a consulting firm based in Boston. Vanguard’s unit dedicated to them serves advisers and wealth managers at banks, brokerage firms and registered investment advisers.
Historically, Vanguard did little or no business with the group. That’s because advisers generally earned commissions on the securities and funds they sold to customers and Vanguard didn’t pay such incentives.
Thomas Rampulla, who heads Vanguard’s adviser unit, started there when the business was first formed in 2002. “I was the head of sales, which meant I was the head of no one,” he said in a telephone interview.
Over time more advisers have shifted to a fee model and away from commissions amid regulatory scrutiny over the costs charged to investors in retirement accounts. Today, 70 percent of advisers get at least half their compensation from asset-based fees, up from 65 percent two years ago, according to a 2016 study by Cogent Reports, a Cambridge, Massachusetts-based research firm.
In a fee system, the cost of the funds is tacked on to the typical 1 percent charge for advice, so using inexpensive funds and ETFs allows an adviser to hold down the price to the customer. Many advisers also now use ETFs to build portfolios that give clients exposure to a range of asset classes.
Jonathan Swanburg, an adviser based in Houston, has switched more of his business to Vanguard ETFs over the past year, attracted by the cost and the unique nature of the company’s business model. The firm is owned by fund investors and profits are passed on to customers through lower fund fees.
“A lot of big financial institutions get a lot of bad press for screwing over their clients,” said Swanburg. “Vanguard doesn’t.”
Alois Pirker, research director for wealth management at Aite, said the good will Vanguard has built among consumers has been critical to its success with advisers.
“I don’t have to apologize for using Vanguard,” said Randy Bruns, an adviser from Downers Grove, Illinois.
Adviser Andrew Jamison, who has been a Vanguard customer since 1999, has recently been having doubts about doing business with the company. Jamison, of Beaverton, Oregon, is concerned Vanguard has been moving into the advice business, offering to build portfolios for customers for about one-third the cost a typical adviser charges.
“They have started to be a competitor,” said Jamison. “I haven’t lost any business as a result, but it could happen.”
Rampulla said Vanguard isn’t a threat to independent financial professionals since the company’s advice business is focused on a narrow segment of investors. The unit, Vanguard’s version of a robo-adviser, combines online help with the option of talking to a company representative. It managed $45.8 billion as of Sept. 30.
When Rampulla joined the adviser division, he thought the trends in the industry would eventually help the firm grow. “I was an optimist,” he said. “But I would have to say the results have exceeded my expectations.”