(Bloomberg News) Vanguard Group Inc. rose to the top of the U.S. mutual fund industry by preaching the merits of cheap index-tracking funds. Now it wants to convert U.K. investors as that country enacts new rules that may lower fund costs that are among the highest in the developed world.

The firm is seeking to expand its less than 1 percent share of the 629 billion pound ($998 billion) market in the U.K. by more aggressively courting financial advisors, who control much of the country's fund distribution, and striking deals to make its products more broadly available. Vanguard last month won access to the 13,000 U.K. advisors who use Cofunds, a platform with 45 billion pounds under administration.

Vanguard, which is owned by its fund investors and passes on cost savings to them, is seeking to take advantage of changes next year that will ban advisors from accepting commissions from asset managers and require them to charge clearly delineated fees. The Valley Forge, Pennsylvania-based firm, which controls 17 percent of the U.S. market for long-term funds, is lagging behind U.S.-based rivals such as BlackRock Inc., the world's biggest money manager, in expanding abroad.

"There's an opportunity for Vanguard, but there are other players who are better known and already are competing aggressively on price," Jason Hollands, managing director of London-based Bestinvest Brokers Ltd., an advisory firm that oversees 4 billion pounds for clients, said in a telephone interview.

'Different Topsoil'

Vanguard's experience will test whether the 38-year-old firm can expand an international business that accounts for 6 percent of its $2.2 trillion in assets. The company, which overtook longtime leader Fidelity Investments two years ago at home as fund buyers flocked to passively managed products, is short on history and name recognition in Britain, where it started selling index funds in 2009.

"It is not easy for a brand to put down roots in different topsoil," Nancy Koehn, a professor at the Harvard Business School, said in a telephone interview from Boston. "How do you build trust when you are starting anew?"

The Financial Services Authority, the U.K.'s fund regulator, is responsible for the new rules known as the Retail Distribution Review, or RDR. The rules, completed in March 2010 and set to take effect Jan. 1, are designed to give consumers access to unbiased advice and to promote competition in the fund industry. Advisors in the U.K. will be paid by customers in exchange for the guidance they offer, while brokers can accept commissions from fund managers so long as they don't provide investment advice.

Higher Expenses

The cost of investing in British funds is higher than anywhere in the developed world aside from Scandinavia and Canada, according to academic research published by the Review of Financial Studies in 2009. The average British mutual fund charged 2.21 percent of its clients' assets in annual expenses, compared with 1.04 percent in the U.S.

Consumer advocates including Gareth Shaw blame the higher prices on an opaque fee structure that makes it hard for investors to make fair comparisons and a commission system that rewards advisors for selling products rather serving clients.

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