Mutual Funds

Vanguard Wants All of You

Already number two in fund assets, Vanguard wants to be number one in advice.

By Jeffrey R. Kosnett, Senior Editor

From Kiplinger's Personal Finance magazine, October 2004

Capitalism was centuries old when modern-day China embraced that economic concept, and look how its 1.3 billion newly minted capitalists are setting the world economy on its ear. By the same token, mutual fund companies have dabbled in financial planning for years. But now Vanguard Group -- whose dirt-cheap index funds have made the firm as much a philosophy as a mutual fund company -- is jumping with both feet into the planning business. Given Vanguard's track record for taking an idea and making it work, you should pay attention.

Right now, Vanguard runs the nation's second-biggest fund business, managing $730 billion and gaining on industry leader Fidelity. But while that's going on, Vanguard's boss, Jack Brennan, wants to build a second Vanguard based on sales of cheap, no-commission, broad-based financial-planning services. Brennan's vision is for an army of certified financial planners to man rows of cubicles at Vanguard's campus in Malvern, Pa., and at satellite locations in North Carolina and Arizona. The company's new mission: to become America's favorite financial hand-holder.

This mission plays not only to some of Vanguard's strengths, but also to investors' desire for simplicity. Many other financial firms also have planning services. And though Vanguard's pricing is at the low end of the spectrum, it's not alone there. Charles Schwab, for example, offers planning services for as little as $125 per quarter, which includes an annual phone portfolio consultation and quarterly updates by e-mail.

Still, Vanguard aims to be the low-price leader. It may take years, but Brennan says Vanguard can build Vanguard II without raising fund fees or paying commissions to a sales staff. Given that Vanguard likes high fees and commissions as much as Donald Trump likes cheap suits and flying coach, that plan seems a safe bet. Brennan's passion is palpable: "We're ideally positioned to help our investors -- our family members -- get educated," he says.

Pay to play

As Brennan chats with a visitor in a sitting room at Vanguard headquarters, he extends his right arm skyward, looking like Babe Ruth making his famous home-run call in the 1932 World Series. This gesture indicates that, as fast as fund sales are growing, the demand for Vanguard's financial advice and personal-asset management is multiplying even faster.

Vanguard quietly began its advice venture in 1996. Business has doubled in the past two years, although the company is mum on the number of clients and on revenues. However, Vanguard's program for wealthier clients -- which is separate from the planning-for-the-masses program and offers money management in addition to advice -- already has $6.5 billion under management, most of it in Vanguard funds. (This program requires a minimum of $500,000 to invest and costs 0.75% of assets per year.) So Vanguard has proved it can bring in millions selling advice.

As for the standard plan, Vanguard's happy mutual fund clients and low-cost funds must be behind the surge in sales because the product is pretty boilerplate. You start the planning process by listing your investments and answering a series of attitude questions, such as how much risk you're willing to take. The process, which you can initiate online or by phone, can take from one to three hours.

Vanguard gets back to you in about 30 days with a 65-page document. The first 20 pages advise changes in your portfolio and explain why specific funds are being recommended and what is behind the specific allocations being suggested for each fund. The remaining pages discuss your cash flow, savings, projected income at and throughout retirement, and the rudiments of estate planning. Some of the recommendations are based on your particular situation; most of the document is general advice. This type of plan is typical of the printouts you can get from many brokerage firms or from any financial planner.

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