July 12, 2012 / 5:16 PM / 5 years ago

Exclusive: Vanguard weighs push into banking

BOSTON (Reuters) - Vanguard Group is considering offering more banking services, the U.S. mutual fund leader said, at a time when asset managers may need new ways to hold on to clients’ cash if proposed rules shrink money market funds.

Options for Vanguard could include starting its own retail bank or partnering with an existing one, Sean Hagerty, head of the company’s portfolio review department, said in an interview.

Vanguard already offers some cash-management services like check-writing through a deal with PNC Financial Services Group Inc (PNC.N).

Industry analysts said Vanguard could also follow rivals offering online banking services, or it could make its limited bill-paying services available to more account holders.

But Vanguard is a long way from introducing new products and may not proceed at all, Hagerty said. The $1.6 trillion fund firm, headquartered in Malvern, Pennsylvania, is surveying customers based on their interest in products like bank savings accounts and certificates of deposit, he said.

The survey went out in response to customer interests, not because of possible changes to money funds, he said. “It’s more correlation than causation.”

Still, some analysts say a move by Vanguard into banking could provide a “Plan B” if regulators impose new rules on money funds that prompt investors to shift to other savings products.

Under one draft proposal under review by the U.S. Securities and Exchange Commission, money funds would either have to allow their net asset values to vary from the $1 per share customers expect, or adopt capital buffers and withdrawal restrictions. Executives at Vanguard and rivals have said such changes could drive away investors.

Vanguard’s banking talk amounts to “a way to be prepared if the money market fund industry gets turned on its head,” said Daniel Wiener, chief executive officer of New York wealth adviser Adviser Investments and the author of a newsletter for Vanguard investors.

Wiener said he was unsure whether Vanguard would proceed. “That’s the $160 billion question,” he said, referring to the total assets in the company’s money funds.

COMPLEMENTARY ROLES

As major buyers of short-term securities like commercial paper, money funds have come to play a complementary role to banks in the financial system.

The financial crisis drove cash out of equity investments, and temporary federal insurance programs helped money funds’ stability. Money fund assets soared to $3.8 trillion in January 2009 from $2.5 trillion in mid-2007, according to data from Thomson Reuters unit Lipper.

Low interest rates have since pushed money fund assets back down to around $2.5 trillion.

Some of the outflow has gone to bank deposits. At the end of March, total U.S. deposits were $10.2 trillion, according to the Federal Deposit Insurance Corp, up from $8 trillion in mid-2007. The shift reflects factors like the perceived safety of bank insurance, said Lance Pan, research director at Capital Advisors in Newton, Massachusetts.

With few signs of a turnaround, financial companies other than banks must look for new ways to grow, according to Pan. “Longer-term, the industry needs to think of a way to restart,” he said.

Low interest rates have forced fund firms to waive billions of dollars in fees just to keep customers invested in money funds. Money fund fee waivers at Vanguard amounted to $9 million across eight funds for their fiscal years ending in 2012.

Fund firms are no strangers to banking, and many, including Charles Schwab Corp (SCHW.N), State Street Corp (STT.N) and AllianceBernstein Holding LP (AB.N), have already set up trust banks, according to U.S. and state regulatory websites.

Vanguard has a trust charter, regulated by the Office of the Comptroller of the Currency, that allows activities like trust and estate-related services, Hagerty said. The company does not have a commercial bank charter.

QUASI-BANKING OFFER

Vanguard also offers bank-like services for some brokerage customers, such as the ability to write checks or pay bills from their money market funds. The services are just one set of products built around its well-known index funds, along with retirement accounts and exchange-traded funds.

Hagerty said the company had considered expanding its banking offerings as recently as three years ago, but decided not to. At the time, money funds seemed sufficiently appealing to investors looking to park cash, he said.

Still, customers have continued to ask about banking services like savings accounts and certificates of deposit.

About eight weeks ago, Vanguard sent out a customer survey to get more details, he said.

The company would not start a bank just because it is fashionable. “We avoid fads at all costs,” Hagerty said.

Reporting By Ross Kerber; Editing by Aaron Pressman and Lisa Von Ahn

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