CHICAGO Feb 7 Like many financial advisers,
Joseph Clemens of Denver has seen his clients wax enthusiastic
about mutual funds from Vanguard, the company that put
index-based investing and low-cost funds on the map.
As the Standard & Poor's 500 stock index built a 30
percent return in 2013, investors flocked to the kind of
investing the Valley Forge, Pennsylvania, fund powerhouse
specializes in, called passive investing. In many cases, they
have called their advisers asking to be put into Vanguard funds.
"There has been a bull market in passive investing. Vanguard
is king," Clemens said. One of every four U.S. dollars flowing
into mutual funds last year was captured by Vanguard, according
to a January report by the research firm Morningstar.
Maybe that is because the average Vanguard mutual fund share
class - excluding money market funds - costs 0.13 percent a
year, compared with 1.15 percent for the rest of the industry,
according to Lipper, a Thomson Reuters company.
Clemens has no problem saying "yes." As a fee-based adviser
whose clients' assets sit in Charles Schwab accounts,
he is able to buy some Vanguard funds by paying transaction fees
that typically are less than $10 per trade.
But the Vanguard juggernaut can present problems for other
kinds of advisers.
It presents a particular challenge to traditional brokers,
who make their money by earning commissions on the products they
sell. Often their company trading platforms do not carry the
full breadth of Vanguard funds, and brokers do not make money on
the products they do offer when they encourage clients to buy
TRADITIONAL BROKER WOES
"You can't compete on price with them," says one Morgan
Stanley broker who declined to be named. When his clients
request Vanguard funds, he typically offers alternatives with a
similar investment approach, though they will cost more.
If clients balk, he plays up the importance of the
comprehensive service they receive from him on other investment
"Is Vanguard going to pick up the phone and call the client?
Generally speaking, the answer is 'no,'" he says. "With
Vanguard, you're kind of on your own."
Some brokers offer workaround solutions to get their clients
into Vanguard funds.
One Merrill Lynch adviser, who also declined to be named,
says he recommends that clients he thinks should have a Vanguard
municipal bond fund buy it through Merrill Edge, Bank of America
Corp's online discount brokerage site.
Once the Edge account is open, the adviser then prompts the
client to transfer the Vanguard funds to a regular Merrill
account. He says firm officials have not questioned the
OFFERING A TISSUE, NOT A KLEENEX
David Shotwell, a fee-only adviser based in Ann Arbor,
Michigan, whose firm manages $47 million, says he sometimes puts
clients into Vanguard, but he often looks for comparable
substitutes more readily available on the Fidelity platform he
uses for his clients' accounts.
"It's like saying you want a Kleenex when you need a
tissue," Shotwell says. "I approach it from the idea that they
are not necessarily after Vanguard per se, but rather after a
low-cost, passive-index approach. The trick is figuring out why
they are asking for Vanguard and then looking at funds that
provide those solutions."
Besides offering its array of products to investors directly
and through employee benefit plans, Vanguard makes most of its
funds available through brokers and investment advisers at
varying costs, says Jack Brod, a principal in the company's
financial adviser services division.
Independent advisers who clear trades through broker-dealer
networks such as Fidelity may not have access to Vanguard mutual
funds, but they can buy comparable Vanguard exchange traded
funds (ETFs). Both ETFs and index mutual funds seek to track
closely an index benchmark. ETFs can be even lower-cost than
mutual funds though they typically require transaction costs;
the market price for ETFs fluctuates throughout the day, while
mutual fund shares are priced once after the close of trading.
"If you buy a Vanguard ETF, you're going to pay a commission
or transaction fee," says Brod, adding that Vanguard's business
with advisers has been growing due to more advisers adopting a
fee-based business model that does not require them to sell
commissioned mutual funds. "We do a significant ETF business."
Clemens, the Denver-based adviser, uses Vanguard ETFs for
his clients, paying transaction costs of less than $10 per
LESS INVESTMENT PICKING, MORE PLANNING
Of course, advisers who function strictly as planners and do
not manage client money tend to be indifferent to the brands
their clients request. Amy Jo Lauber, a fee-only financial
planner outside of Buffalo, New York, often turns to Vanguard
funds for her customers, many of whom are engineers.
"Most of them are very much do-it-yourselfers," she says.
"Just tell them which funds and they'll go on the website and
fill out the application themselves."
Whatever the approach to obtaining passive investment funds,
it appears clients' interest in them is not waning, says Mike
Rawson, the Morningstar analyst who authors the monthly fund
He notes there is at least one worthwhile outcome that
financial advisers should take note of. The increasing emphasis
on passive investment choices means that advisers will spend
less of their service time helping clients select funds based on
the performance of active fund managers and more time on their
long-term financial strategy.