Vanguard bolsters efforts to woo financial advisers

Despite once having been seen as betraying financial advisers, The Vanguard Group Inc. of Malvern, Pa., continues to ratchet up efforts to court them. But the fund company may not be doing enough to heal old wounds. Many advisers felt that Vanguard had "turned its back" on them when it abruptly got out of the custody business in 2003, said Geoff Bobroff, an industry consultant in East Greenwich, R.I. Those feelings were fanned in 2006 when Vanguard established a new business unit to sell simplified financial plans to its customers through in-house advisers. In his online message earlier this month to advisers, Vanguard chairman John J. Brennan wrote, "The symbiosis is tremendous."
"We believe that adding Vanguard [exchange traded funds] and mutual funds ... is a tremendous way for advisers to be more successful for their clients and for themselves," he added. It appears some advisers are starting to agree with him — particularly those that use ETFs. At the beginning of the year, Richard Romey, president of ETF Portfolio Solutions Inc. in Overland Park, Kan., didn't use any Vanguard ETFs, but now he uses three and may end up using more, he said. Many of Vanguard's ETFs — particularly its sector ETFs — are cheaper than the competition's, he said. "That does matter to me," Mr. Romey said. "In the past, we have seen very low-cost ETFs on broad-based indexes, but the sectors were still expensive." Vanguard's sector-specific ETFs charge 0.22%, while those from Barclays Global Investors in San Francisco charge 0.48%. Barclays is the market leader with $340.4 billion of assets in 141 ETFs. Vanguard earlier this month dropped expense ratios on four of its ETFs: Vanguard Emerging Markets ETF (to 0.25%); Vanguard European ETF (to 0.12%); Vanguard Pacific ETF (to 0.12%); and Vanguard High Dividend Yield ETF (to 0.25%).

MARKETING APPROACHES

But price isn't everything. Barclays provides advisers with much better "support" than Vanguard, Mr. Romey said. He regularly receives calls from Barclays. Vanguard has picked up the pace by sending him weekly mailings, which Mr. Romey said he can use to educate his clients about ETFs. But he's still more likely to hear from Barclays, he said. "I've probably gotten mail from Vanguard, but their efforts are noticeably less intensive" than either Barclays or State Street Global Advisors of Boston, said Rick Miller, a financial planner with Sensible Financial Planning and Management LLC in Cambridge, Mass. SSgA is the second-largest ETF provider in terms of assets, with $131 billion in 64 ETFs at the end of October. There just doesn't seem to be as much outreach from Vanguard, said Mark Balasa, co-president of Balasa Dinverno & Foltz LLC in Itasca, Ill. The only thing he has received recently from the company is an invitation to a Chicago symposium about how Vanguard can help advisers build their businesses, he said. It was useful, Mr. Balasa said, but the general lack of communication from Vanguard is puzzling, especially since it didn't launch its first ETF until well after Barclays and SSgA had established themselves in that market. "From our perspective, Vanguard was slow to respond to what SSgA and Barclays was doing," he said. "In some ways, we kind of dismissed them." Mr. Balasa, however, said he has come to realize the value of Vanguard's ETFs — particularly its bond ETFs, which have expense ratios of just 0.11%. Barclays' fixed-income ETFs have expense ratios of 0.24%. About 90% of the growth in Vanguard's ETFs is believed to have been generated by advisers, said Martha G. Papariello, a principal with the firm's financial adviser services unit. Vanguard had $22.4 billion in assets in 27 ETFs at the end of 2006 and $41 billion in 33 ETFs at the end of October. Tom Lydon, president of Global Trends Investments of Newport Beach, Calif., is skeptical that 90% of that growth is attributable to advisers. It would be difficult for Vanguard to pinpoint with any accuracy who is actually buying its ETFs, he said. But Mr. Lydon said he does believe that Vanguard's ETFs are gaining in popularity with advisers. "In the end, they have a great brand," he said.

OUTREACH

In an online question-and-answer session, Mr. Brennan appeared to acknowledge that Vanguard could be doing more. "Are we perfect? No. Will we ask advisers if we can do better? Absolutely," he wrote. Ms. Papariello, however, ticked off a litany of actions Vanguard is taking to help advisers. Last year, it added features that focus on practice management to its adviser website, she said. The features are designed to help advisers attract new clients, manage current clients, run their practices and advance professionally. Vanguard provides advisers access to surveys to help them gauge client satisfaction, Ms. Papariello said. It also provides online services that allow advisers to earn education credits, she said.
Vanguard has also held financial symposiums for advisers around the county, most recently in Boston, Ms. Papariello said. That symposium attracted 65 advisers, who were able to meet George U. "Gus" Sauter, Vanguard's chief investment officer, she said. Vanguard, however, may be needlessly hampering its adviser efforts by tying them so closely to ETFs, according to at least one industry expert. Its sales force of more than 75 people is expected to grow, but is focused principally on ETFs, Ms. Papariello said. "The main aim of the sales organization has been to educate advisers about ETFs and ... help them understand what they have to offer," she said. "That said, we're happy to talk to them about [non-ETF products], but that's not a major proactive effort." Vanguard is already well-known for providing low-cost mutual funds, so it's not necessary to push them, she said. "I think I'm a little surprised by that," Mr. Bobroff said. Vanguard is especially well- known for its low-cost index funds, he said, but many advisers probably aren't as familiar with its actively managed funds — funds that could complement an ETF strategy. David Hoffman can be reached at dhoffman@crain.com.