Whither Vanguard?

Jonathan Clements

IT WOULD BE difficult to overemphasize how important Vanguard Group is to everyday investors. Many of us have money at the Malvern, Pa., behemoth, which easily ranks as the largest mutual-fund company. But even if investors don’t, they’ve likely still benefited, as other companies have moved to slash their fees and expand their lineup of index funds to compete with Vanguard.

Well aware of this, I follow Vanguard closely—and even more so since Vanguard’s founder, John C. Bogle, died earlier this year. Jack hadn’t been involved in running Vanguard’s day-to-day operations for two decades. Yet his presence continued to loom over the place. I always felt Jack acted as a check on management’s behavior. With his death, that check is no longer there.

Is Vanguard failing investors? Far from it. Earlier this year, Vanguard cut expenses on 22 of its exchange-traded index funds. It was the first time Vanguard made a point of charging less for ETFs than for the firm’s comparable open-end mutual funds. Jack probably wouldn’t have been happy—he preferred open-end mutual funds, because he felt ETFs were traded too much. But it’s hard to argue that lowering expenses is a bad thing. And the fact is, without ETFs, indexing today wouldn’t be nearly as popular as it is.

Meanwhile, not long before Jack died, Vanguard reduced the investment minimum for the Admiral share class of 38 index funds. Admiral shares are Vanguard’s lowest-cost share class geared toward everyday investors—and investors can now get into these funds for $3,000, down from $10,000 before.

This was, no doubt, a competitive response to Fidelity Investments and Charles Schwab. Both have no investment minimum on their index funds, and they’ve lately been operating those funds at tiny expenses in an effort to garner more business. But whatever Vanguard’s motivation, making its lower-cost funds available to more folks is obviously an investor-friendly move.

(A digression: Right now, you only need $1,000 to get into Vanguard’s target-date index funds, but the funds themselves charge higher expenses than if you replicated their mix using Vanguard’s Admiral shares. If Vanguard really wanted to make everyday investors happy, it would introduce a lower-cost version of its target-date funds, even if it meant requiring a $10,000 or even $25,000 minimum investment. Among the many Vanguard investors I talk to, that’s No. 1 on their wish list.)

But while Vanguard has remained on the right path when it comes to both costs and investment minimums, it seems the firm is coming up short in two other areas: product commitment and customer service.

Earlier this year, Vanguard said it was shutting down its Advantage cash management service, prompting an outcry from users. More recently, it announced it was handing over administration of its low-cost variable annuity to Transamerica. There’s now concern that investors in its variable annuity—which is perhaps the only variable annuity worth buying—will face higher expenses down the road.

Vanguard has long been ambivalent about sector funds, which were first introduced by Jack, and that’s reflected in the sorry history of its onetime precious metals fund. In 2004, Vanguard broadened the fund’s mandate to include a wider array of mining companies. In 2018, it revamped the fund yet again, renaming it the Global Capital Cycles Fund. The idea: provide a fund that’s better diversified, but which should still generate returns that aren’t closely correlated with the broad stock market.

Was that a prudent step by management, with an eye to stopping investors from making narrowly focused investment bets? You might assume so—except this year Vanguard turned around and introduced a commodity futures fund. True, the fund has a $50,000 minimum, which means smaller investors won’t be able to buy it. Still, its introduction raises an obvious question: Does Vanguard think sector funds are a good idea or not?

Every time the company flip-flops—whether it’s shutting down its cash management service, handing over the reins of its variable annuity or changing a fund’s strategy—investors are left scrambling. I speak from personal experience. My family and I have been affected by some of these changes.

That brings me to the other big complaint about Vanguard: customer service. I haven’t experienced any problems myself, but I’ve heard from plenty of others who have. On, current and former employees rate the firm 3.1 out of five, versus 3.7 for Charles Schwab and 3.9 for Fidelity Investments. This is unfortunate: Happy employees are more likely to work hard to make their customers happy.

To be fair, Vanguard’s customer service problems aren’t tremendously surprising, given that the firm has grown so fast in recent years. Still, you’d think Vanguard would be focusing its energies on these bread-and-butter issues—rather than, say, introducing a commodity fund or exploring the launch of private equity investments.

I remain a huge fan of Vanguard and I have no intention of moving my money elsewhere. It’s still the financial company I’m most likely to recommend to friends and family. But that’s also the reason I’d like to see Vanguard do better. For a firm that loves its nautical imagery, maybe it’s time to run a tighter ship.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Thinking Out Loud and Balancing Act. Jonathan’s latest books: From Here to Financial Happiness and How to Think About Money.

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