Vanguard share class causes adviser jitters

PHILADELPHIA — The Vanguard Group Inc. is pushing advisers out of a popular class of shares, and some financial advisers and industry experts aren’t happy about the move. Since June, the Malvern, Pa.-based firm has required advisers to purchase a new share class that replaces its Admiral shares on certain index funds. The new shares — called Signal shares — have the same expense ratios as Admiral shares. Those expense ratios are lower than those of Vanguard’s entry-level Investor shares, which have a minimum investment of $3,000. But there is a catch. Advisers will have to come up with a $5 million minimum per fund at the aggregated-firm level to purchase Signal shares. This will limit the ability of advisers to offer their clients Vanguard’s most popular index funds at the cheapest possible level, some say. Before last month, advisers could purchase the affected index funds — a group of 16 that includes the $126.41 billion Vanguard 500 Index Fund — via Admiral shares, which have a minimum initial investment of $100,000 at the client level. Admiral shares of the index funds will still be available to retail investors who can pay the $100,000 minimum, but not advisers, said Rebecca Cohen, a spokeswoman for Vanguard. Advisers with Admiral shares will see their shares convert to Signal shares in October. There will be a three-year grace period providing advisers who haven’t done so time to reach the $5 million investment level required to hold Signal shares. The idea is that by forcing advisers to come up with $5 million per fund at the aggregate level, they will be able to offer Admiral share savings to clients who may not have had the $100,000 to invest in Admiral shares, she said. “We introduced Signal shares in response to adviser requests to offer low-cost shares to all their clients, not just those that meet the Admiral pricing,” Ms. Cohen said. If they prove successful, Signal Shares could be extended to other Vanguard funds, she said.
‘Corralling’ advisers Signal shares, however, should be viewed with suspicion, said Daniel P. Wiener, Brooklyn, N.Y.-based chairman and founder of Adviser Investment Management Inc. of Newton, Mass., which oversees about $1 billion in assets. It seems to be an attempt by Vanguard to “corral” advisers for no other reason than to control them better, he said. “I would be very leery,” said Mr. Wiener, who also is editor of The Independent Adviser for Vanguard Investors, a monthly newsletter. Rather than making it easier on advisers, the move will make it difficult for even midsize advisers to give their clients access to Vanguard’s index funds at the lowest cost possible, said Rick Miller, chief executive of Sensible Financial Planning and Management LLC of Cambridge, Mass., which has $150 million under management. Even if the advisers have the $5 million required to plunk down on a particular Vanguard fund, they may not want to put such a big chunk of their clients’ assets with that fund, he said. “It’s limiting my options,” Mr. Miller said. It may force Mr. Miller — who uses some Vanguard index funds — to move more assets to equivalent exchange traded funds, he said. And while he likes the ETFs Vanguard offers, he said, he would have to consider competitively priced ETFs from its rival Barclays Global Investors of San Francisco. The creation of Signal shares is further evidence that Vanguard doesn’t understand the intermediary market, said fund consultant Burton Greenwald, president of Philadelphia-based B.J. Greenwald Associates. The idea behind the new shares is good — that loyal advisers will be rewarded, he said. But the execution of that idea leaves a lot to be desired, Mr. Greenwald said. “They’ve got to modify it,” he said. “It seems to exclude too many potential users.” Rewarding clients Other industry experts and advisers disagree. “It’s logical for Vanguard to reward clients who place more assets with it,” said Charles “Chip” Roame, managing principal of Tiburon (Calif.) Strategic Advisors LLC. And he thinks that advisers who don’t use Vanguard’s funds as much as others shouldn’t necessarily be rewarded in the same way. Vanguard is merely “focusing” its efforts on a group of advisers more dedicated to its funds, Mr. Roame said. “That’s how everyone should run their business,” he said. Although it may initially put Jeff Broadhurst, president of Lansdale, Pa.-based Broadhurst Financial Advisors Inc., at a disadvantage, because he doesn’t have the assets to meet the minimum required to get into Signal shares, he said he sees the logic in what Vanguard is doing. It is good to reward advisers who reach a certain level of assets in a fund, said Mr. Broadhurst, whose firm has more than $25 million in assets under management. “I don’t think there’s a problem,” he said.