Updated Thursday, July 24, 2014 as of 7:03 PM ET
Portfolio - Investment Products
Vanguard Takes Aim at U.K. as Fees Replace Advisor Commissions
by: Charles Stein and Kevin Crowley
Friday, November 16, 2012
Print
Email
Reprints
Partner Insights

Because Vanguard had so much room to grow at home as indexing took hold, the company was slow to move overseas, Chief Executive Officer F. William McNabb said in an April interview at the firm’s Valley Forge, Pennsylvania headquarters. The international business will “be an important pillar” in the coming decade, said McNabb.

At New York-based BlackRock, 40% of assets were outside the Americas as of Dec. 31, according to data compiled by Bloomberg. At San Mateo, California-based Franklin Resources Inc., non-U.S. assets were 34% as of Sept. 30, company data show.

Britain’s rule change may create an opening for Vanguard, said Rampulla, who sold products to U.S. financial advisors before moving to London four years ago.

As American advisors abandoned commissions in favor of asset-based fees over the past decade, they became more sensitive to the costs they were passing on to clients and in the process, turned into better customers for Vanguard, he said. Vanguard’s assets managed for U.S. advisors rose to $620 billion as of Sept. 30 from $260 billion at the end of 2007, company data show.

‘Good Value’

“We were a good value proposition,” Rampulla said.

In the U.K., winning over advisors is critical because the market is more advisor-driven than in the U.S., he said. “There is very little direct business.”

Mutual-fund sales by intermediaries such as financial advisors and wealth managers are about six times greater than direct sales to consumers, according to the Investment Management Association, the industry’s lobbying group.

Vanguard has already won converts. Alan Smith became a customer in 2010 when he and his colleagues soured on stock pickers after the global financial crisis.

“We couldn’t find a compelling reason to remain exposed to active funds” said Smith, CEO of Capital Asset Management, a London-based wealth-management firm that oversees 125 million pounds, 40% of it with Vanguard.

James Norton, whose London-based Evolve Financial Planning Ltd. manages 200 million pounds, including Vanguard funds, said passive investing in the U.K. is growing.

Lesser Known

Index funds, known as trackers in the U.K., represent about 7% of the British market for mutual funds, according to the Investment Management Association, about half their share in the U.S.

“When advisors aren’t getting paid commission, I think more of them will take a look at the likes of Vanguard,” Norton said in a telephone interview.

Vanguard had 3.1 billion pounds in British mutual funds as of Sept. 30, according to Morningstar data.

That compares with about 40 billion pounds for Atlanta- based Invesco Ltd., 32 billion pounds for BlackRock and 28 billion pounds for New York-based Bank of New York Mellon Corp. The largest fund provider by assets is M&G Securities Ltd., the fund management unit of London-based Prudential Plc, which is the U.K.’s biggest insurer.

“The more savvy investment advisors have heard of Vanguard, but the majority of people still don’t know the name,” Norton said.

Lacking ‘Advantage’

Vanguard’s biggest British index fund, the 556 million pound Vanguard FTSE UK Equity Index Fund, ranks 22nd in size among the country’s index funds, Morningstar data show.

Price competition has intensified because of Vanguard’s entry into the market, said Christopher Traulsen, director of Morningstar’s fund research in Europe. London-based HSBC Holdings Plc dropped the expenses on its index funds by as much 88% within a week after Vanguard’s arrival in the country, Traulsen said in a June 2009 article headlined “The Vanguard Effect.”

Vanguard now has a modest price edge over most peers, Traulsen said in a telephone interview. Its fund that tracks the FTSE Index charges 15 basis points, compared with 21 basis points for the larger BlackRock fund and 30 basis points for the Fidelity MoneyBuilder U.K. Index Fund, Bloomberg data show. The Royal London FTSE 350 Tracker Fund charges 12 basis points.

Distribution Deals

“Vanguard is lacking in competitive advantage,” said Ben Yearsley, head of investment research for direct investing at Charles Stanley Group Plc, a London-based firm that oversees 15 billion pounds.

Vanguard’s Rampulla isn’t discouraged. He said the firm’s unusual structure -- it is owned by the investors in its funds - - will resonate with the public.

Because the company refused to pay commissions, Vanguard products originally weren’t offered by most advisors or platforms that distribute funds, Rampulla said. That’s changing as commissions vanish.

“We are no longer going to be fishing in just a small part of the pond,” he said.

Similar deals to the Cofunds distribution agreement may be announced before year-end, Rampulla said. As the rule change nears, the company is running an educational program for advisors that lets them know how their counterparts in the U.S. and Australia have coped with the transition to a world without commissions.

No Guarantee

Vanguard wasn’t an overnight success in the U.S., said Ben Johnson, Morningstar’s director of passive research in Europe and Asia.

“It was a process that was decades in the making,” Johnson, Morningstar’s director of passive research in Europe and Asia, said in a telephone interview.

Vanguard’s limited name recognition and the lack of a prominent “evangelist” like Bogle in the U.K. advocating for index funds makes it likely the firm’s progress will be gradual, Johnson said.

“It is not a guarantee they will succeed, but over the long term, the odds are in their favor,” he said.

Get access to this article and thousands more...

All Financial Planning articles are archived after 7 days. REGISTER NOW for unlimited access to all recently archived articles, as well as thousands of searchable stories. Registered Members also gain access to exclusive industry white paper downloads, web seminars, blog discussions, the iPad App, CE Exams, and conference discounts. Qualified members may also choose to receive our free monthly magazine and any of our daily or weekly e-newsletters covering the latest breaking news, opinions from industry leaders, developing trends and growth strategies.

Already Registered?

Lists
2014 Summer Reading List for Advisors

Current Issue

The July Issue is now online!


TWITTER
FACEBOOK
LINKEDIN

Industry Events

August 10, 2014 |

September 9, 2014 |

September 17, 2014 |

September 20, 2014 |

September 28, 2014 |

Already a subscriber? Log in here