FREE NEWSLETTER

Whither Vanguard?

Jonathan Clements  |  August 3, 2019

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 Glassdoor.com, 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.

Do you enjoy HumbleDollar? Please support our work with a donation. Want to receive daily email alerts about new articles? Click here. How about getting our weekly newsletter? Sign up now.

Subscribe
Notify of
10 Comments
Inline Feedbacks
View all comments
SanLouisKid
SanLouisKid
2 months ago

One thing I like about Vanguard is the pressure it puts on the entire investment world to reduce expenses. I wonder how much money has been saved overall from firms who were forced to reduce costs by the competition from Vanguard.

Raj Sundaram
Raj Sundaram
1 year ago

This weekly note seems so timely since just this week I’ve been struggling with Vanguard. I’m trying to make some changes and moving a total of 5 accounts for my wife and me to Vanguard from Betterment. The documents reached Vanguard on 02-July. Account transfers for 2 were initiated on 11-July. There was no update on the other 3. I sent a Vanguard support email, and got a response back that all 5 were sent but only the status for 2 were correctly updated, but I should be good as it’s just some kind of a clerical error. I then asked what are the odds that the 2 that were correctly status updated were the two that’s getting transferred. I got a response that he checked again and all 5 were sent together on the same date of 16-July (even though it said 11-July on the 2 successful ones). Nothing happened after that. I checked with Betterment and they mentioned they only got 2 transfers that they promptly transferred (quicker than Vanguard sent out the transfer requests). I finally decided to call on 27-July, and after a lot of holds and discussions, I was told that 3 were missed and would be sent by 30-July, and I would see a status update on 31-July. Come August 2nd, and there were no updates. I called them on 02-Aug (yesterday) to check the update. I was told that the documents were sent out as planned but they think the status updates now might take a week to show up. Not sure what to believe. If not for Vanguard’s reputation, I would have thrown in the towel and just moved somewhere else.

booch221
booch221
1 year ago

What I don’t like about Vanguard lately is their constant attempts to get me to sign up for their Personal Advisor Service. The annual cost is 0.30% of the assets in your Vanguard accounts. For me that would d raise my cost from 0.07 to 0.37 percent –an additional $5000 a year. When I retired Vanguard prepared an financial plan for me and would give me a free check-up every year. Now they won’t unless I sign up for PAS, even though I have $1.65 million invested with them.

CJ
CJ
1 year ago

My biggest beef is their dated IT/security – there is still no way to set up multi factor authentication without a phone number – and phone numbers are easily swiped/ported remotely by hackers. The strongest protection – a physical yubi key – still defaults to phone as a secondary method that anyone with access to the account can choose.

Langston Holland
Langston Holland
1 year ago
Reply to  CJ

Very helpful CJ, thank you. I just looked into this and you are correct, Vanguard inexplicably punts back to your phone number for the 2nd step of two factor authentication (2FA) if you don’t insert your registered hardware key. IOW, using a Yubikey with Vanguard is (almost) worthless.

By “almost”, I mean that I found an article that suggests a way around some of this weakness by selecting automated voice calls with the security code instead of SMS delivery.

Wow. I’d hoped you were wrong. Vanguard needs to up their game on this yesterday.

CJ
CJ
1 year ago

Unfortunately this has been mentioned numerous times – on forums and directly to Vanguard. As of now, they don’t seem to have any urgency or plans to change this.

Joe Alfonso
Joe Alfonso
1 year ago

Not to mention how cumbersome it is to try to manage investments for clients on their retail platform.

Deskandchairs
Deskandchairs
1 year ago

Does anyone else find that navigating around Vanguard’s brokerage website has very slow response times? I have used both Safari and Firefox browsers and get the same slow result. I have another brokerage account with TD Ameritrade and find that I can navigate from screen to screen at the speed I would expect, that is similar to less complicated websites.

miles dudley
miles dudley
1 year ago

i have the Transamerica variable annuity with only a small starter amount. I was disappointed to see vanguard disintermediate itself. The contract specifies a limited range they can charge for fees, not too much. I think the contract also allows you to withdraw the entirety of your balance without penalty if you want to. Correct me if I’m wrong. I just hope Transamerica does not try to rewrite the contract terms on the fly.

Molly Salyard
Molly Salyard
1 year ago

I am new to much of this stuff-however I READ a lot-And-I have lived a life close to-‘Wall Street CEO types’ and have seen enough Wisdom and foolishness-to know the difference-Jack Bogle WAS remarkable -one of a kind-It is virtually unheard of for a man to have Lived his message-That he worked to make it ‘Safe’ for ‘average'(Whomever THAT is) people to invest- Whether Admiral Shares are 1 grand or 10 -I believe misses the point-The fact that it is CLEAR what the expenses are-and the efforts to minimize ‘conflict of interests’…Was a ‘new idea’…a scarey thought in itself- I am not sure with Jack Gone it will be sustainable-Like Steve Jobs effort towards simplicity-and Apples-current-un simple ‘iPLAN’ Vanguard is in danger of trying to be too much to too many people-Jack Struggled his entire career-his message was NOT easily Born-..I too am saddened at his death-as men of integrity? Since the beginning of time-Have been rare-at EVERYstatus and income level- A Company like Vanguard now has all the pressure to become 2 many things:..-a tech wizard-a bank-Robo center-AND 2 compete w/ other firms-As I write this..I am wondering-Which will be standing-in a decade or 2? It is not EASY to keep things Simple-…The one thing that was simple? Jack Bogle ? Could be trusted to be accountable and HE? could be trusted-with him gone?.I know the accountability to HIS lifes work..? Is no doubt-in some question. at least to me…I do have less confidence-Accountability in the area of Finance and Wall Street? Is sadly lacking-Jacks message was that accountability is not optional-

Free Newsletter

SHARE