Vanguard steps up efforts to woo advisers

Mar 11, 2012 @ 12:01 am

By Jason Kephart

The Vanguard Group Inc., the biggest mutual fund company in the nation, is dramatically stepping up its efforts to court financial advisers.

The 36-year-old fund company, which rose to prominence by selling low-cost index mutual funds directly to investors, is more than doubling the number of sales representatives who work with financial intermediaries to 220, from 100. The move will let the firm better compete in the field with its chief rivals in the exchange-traded fund arena, namely BlackRock Inc. and State Street Corp., as well as traditional mutual fund firms such as American Funds.

For the first time, Vanguard is placing those sales reps in offices all around the country, rather than basing them out of its central sales office in Scottsdale, Ariz., or its headquarters in Valley Forge, Pa. The reorganization is intended to make Vanguard's sales team more efficient and allow the firm to better recruit and retain top sales reps.

FEE-BASED ADVISERS

The moves by Vanguard, which manages $1.75 trillion in assets, represent the latest iteration in the fund company's efforts to target advisers who charge fees based on the assets that they manage, rather than collect commissions for each transaction.

In recent years, Vanguard's low-cost index mutual funds and its ETFs have gained popularity among fee-based advisers. Vanguard is the nation's No. 3 ETF provider, behind BlackRock's iShares and SSGA, and saw assets in its 64 ETFs climb 20% over the 12-month period ended Feb. 29, to $200 billion.

Meanwhile, BlackRock and SSGA's ETF assets climbed 8% and 6.7%, respectively.

Although Vanguard has long had a following among advisers who buy its funds directly, it never pursued those relationships actively until recently. For example, the firm didn't form a unit focused on advisers until 2002, and that unit remained tucked away in its institutional-services arm until last May.

“We're late to the game,” said Martha King, managing director of Vanguard's Financial Advisor Services division. “But we've never offered commission-based products, so there wasn't much reason to actively be selling to advisers.”

Even so, the firm has managed to earn the loyalty of advisers, no doubt due in large part to its reputation for low costs.

About $250 billion of the firm's $1.75 trillion in assets are overseen by advisers, up from $85 billion in 2002, when the division was first created.

“We've been getting really good results from working with financial advisers, but we can penetrate further into that market,” Ms. King said.

Just how much more of the market Vanguard can win over remains to be seen. It outpaced the asset management universe in terms of product sales over the past three years.

Since the beginning of 2009, Vanguard's net asset inflows have totaled about $292 billion, 71% more than Pacific Investment Management Co. LLC, the next-best-selling fund family, according to Morningstar Inc.

HARD TO PREDICT

Whether increasing the sales force will improve or even hold those numbers steady is nearly impossible to predict, said Paul Justice, an ETF analyst at Morningstar.

“It's hard to tell what the right size of a sales force should be,” he said.

There is also such a thing as having too many sales representatives, said Hari Krishnaswami, senior managing consultant at kasina LLC.

“At some point, the number of salespeople becomes prohibitive,” he said. “What I would be concerned about is, given that the products are not high alpha generators, whether or not a larger sales force is going to lead to profit margins that are sustainable.”

For its part, Vanguard insists that the expansion is warranted.

The size of the firm's external sales force was never right to begin with, Ms. King said.

For the most part, the number of reps — as well as the firm's strategy for selling through advisers — was based on “educated guesses,”she said.

Now, however, the firm thinks that it has found the right approach for dealing with advisers.

That involves selling its mutual funds and ETFs based on the notion that advisers can add alpha for clients by using low-cost products and investing for the long term, Ms King said.

To some advisers, such as Bill Harris, co-founder of WH Cornerstone Investments LLC, the expansion of Vanguard's sales force is great news.

In his 16-plus years as a financial adviser, Vanguard sales reps have been more myth than reality.

“I've never spoken to a Vanguard wholesaler in my life,” Mr. Harris said. “It's helpful for advisers to know what a firm's thinking [is] and what their products are comprised of.”

John Eckle, president of Pinnacle Investment Inc., tends to be wary of sales reps, choosing to meet only those from firms with which he already invests.

But despite using Vanguard ETFs, and expecting to increase his use of them, he said that he rarely hears from Vanguard.

“There's a whole education of how to buy and sell ETFs,” Mr. Eckle said. “We're always looking for that kind of advice.”

jkephart@investmentnews.com

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