Vanguard Cutting Services to Small Advisers

December 31, 2002, 1:00 a.m. EST 2 Min Read

In what looks like a push to concentrate on well-established, asset-loaded firms, Vanguard has cut back on services to advisers with less than $5 million in custody with the company.

Those advisers will still be able to maintain accounts on clients' behalf at Vanguard. But they are losing perks like the capability to have their fees deducted from client assets, to do daily transaction downloads, and to use consolidated position reporting.

"We realized the need to raise that minimum," said Martha Papariello, principal with Vanguard's Institutional Investor Group. "That's not different from what we've seen happen across the custodial landscape."

The threshold had been $1 million. Vanguard started using the $5 million benchmark for prospective clients over the past year. And since the middle of the year, the company has been notifying existing clients they will be shifted to the retail side.

"We were expecting disappointment," Papariello acknowledged. "And clients have registered just that."

Vanguard's decision meant he could no longer access client accounts on the Internet through the adviser channel and could not do electronic trading.

"We weren't actually even given the opportunity to bring assets up to $5 million and stay in the program," he said. "We prevailed on them, and they agreed to let us stay in the program if we had $5 million by Dec. 6."

The firm transferred accounts from Waterhouse and forked over some of their own money to stay in the program.

"It was very awkward to be in that situation," said Rogers. "I wish they could have taken it on more of a case-by-case basis. We are a young firm, (started in 1998) and my partner and I are young. We'll be in business for a couple of decades."

"Philosophically we're huge fans of Vanguard," he said. "We like their indexing approach, their low expenses, and the consistency of their funds' performance."

Hull said it's unfortunate that Vanguard has made the change because it makes it harder for new advisers to get off the ground. "It used to be that Vanguard would basically take you if you had anything," he said. "There is going to be no place for them to go now. There's no place to start."

As of Oct. 1, Vanguard had $530 billion in custody assets.

On the other side of the coin is Tom Rogers, principal of Portland Financial Planning Group in Portland, Maine. "To be honest, we were totally blown away by this because we had not been given any advance notice," he said. "I'm basically like anybody in the street now," Hull said, who will now be joining TD Waterhouse. "The bottom line is I'm moving everybody out of Vanguard." Samuel Hull, a CFP with Northstar Financial Planning in Bedford, N.H., got the Dear John letter from Vanguard at the beginning of the month. "I've used Vanguard for little old ladies for a couple years," said Hull, whose total assets with the company have risen above and dipped below $5 million regularly.