Vanguard's Advisory Service Rattles Advisors Who Use Its Funds For Clients

The Vanguard Group, which in 40 years became the biggest mutual fund company by selling low-priced, market-matching funds, is competing with some of its best customers -- the brokers and advisors who funnel client assets to its funds -- by offering personalized service to investors.

Making things worse for outside advisors, Vanguard is charging 0.3 percent of assets annually or less, compared with the 1 percent to 3 percent common among brokers and independent financial advisors. That's down from the 0.70 percent Vanguard used to charge. And the company has widened the pool of eligible investors to include people with $50,000 or more, down from the former minimum of $500,000.

Some advisors said they can't compete with Vanguard's prices nor its marketing muscle. David Lewis, whose Resource Advisory Services in Knoxville, Tennessee, manages about $97 million, said he lost a client in April with an account of almost $2 million to Vanguard because of its lower fees and offer of a personal advisor.

"We like to think we're doing more than they can do," said Lewis, 67, who offers advice about areas including retirement accounts, taxes and estate planning. "The gentleman said in his exit call that he really appreciates us but didn't need our level of service now that the big work was done."

Vanguard said it expanded its advisory service because most of its customers seek retirement advice but aren't willing to pay the usual fees.

The cuts reinforce the nonprofit company's mission to produce strong returns for investors through keeping operational and management costs low, company executives said.

"Obviously there are going to be some advisors who think we are treading on their turf," said John Bogle, the 86-year-old founder and former chief executive of Vanguard, told Reuters. "We've never been as directly competitive as this, but at some point you have to stand up for what you believe."

The new program risks alienating the advisors at outside brokerages, banks and financial planning firms who last year were responsible for more than half of the record $214 billion that Vanguard collected from investors.

In 2009, about 27 percent of Vanguard's $1.35 trillion in assets under management were funneled through banks, brokers and independent advisors, the company said. Today, about a third of its $3 trillion in assets came from those third-party salespeople.

Vanguard officials say that its new Personal Advisor Services program won't compete with high-end advisors. The company's advisors talk to clients online or by phone, and offer a fairly bare-bones array of products and services.

"Even if we win business that is up-market, it will be different from the in-person, high-touch guidance clients experience with advisers," said Martha King, who until recently ran Vanguard's third-party sales unit and heads its institutional division. "We are not going to be living in their communities."