Vanguard is known worldwide for putting individual investors first and acting with integrity. This is why a recent SEC order against Vanguard is so damning.
On August 29, the SEC issued an order directing Vanguard to pay a $19.5 million penalty for failures to “adequately disclose conflicts of interest."
The SEC reported how from August 2020 to December 2023, Vanguard claimed on its website that advisors were “salaried” and “have no financial incentives to recommend certain products.”
However, those advisors were incentivized to enroll Vanguard “clients” into their managed account program, “Personal Advisor Services," according to the SEC. So for three years, Vanguard failed to tell clients the simple truth in plain language about PAS advisor compensation.
What the heck is this? This clear dishonesty hit me hard. I’ve invested with and have advocated for Vanguard for decades.
I believed Vanguard was different. Now, I’m not sure.
Vanguard’s own Code of Ethical Conduct declares: “Our clients … are relying on us to conduct our business with the utmost integrity, honesty, and trustworthiness. … to put their interests first, not our own.”
Vanguard could have followed its ethical code. Those alleged false statements could have been replaced by the simple truth: That there were incentives for its advisors to enroll and retain clients in PAS. Instead, Vanguard spoke legalese and failed.
This failure strikes at Vanguard’s heart: integrity and a client-first culture.
In 2020, the Institute for the Fiduciary Standard published research on how investors view Jack Bogle and Vanguard. Vanguard’s extraordinary reputation comes through there, with 73% of Vanguard investors rating Vanguard a 9 or 10 on a ten-point scale.
That's far higher than how they rated stellar firms as Berkshire Hathaway (43%), Apple (38%), or Microsoft (29%). Charles Schwab (22%) and Merrill Lynch (16%) trailed behind.
Vanguard investors recgnized Jack Bogle's investors-first advocacy by giving his firm high marks. But it’s easy to see how that may be battered by blatant failures to tell the truth – and now, it looks more like other sales or financial firms.
In January 2024, Gallup published a report on how the public views honesty and ethical standards across 23 occupations. Nurses, veterinarians, engineers and dentists lead with 78%, 65%, 60% and 59% ratings respectively. Investment advisors are not rated. Near the bottom are car sales people, stockbrokers, insurance sales people and bankers with ratings of 8%, 12%, 12% and 19%.
The lesson: high ratings are held by professions not associated with finance or sales; low ratings are held by financial or sales occupations.
Vanguard has stayed above the stigma of financial or sales occupations for decades. Can it continue?
In May, I wrote a blog on Vanguard turning 50 and noted: "Jack Bogle sought to make Vanguard a 'company that stands for something.'" This means upholding “integrity, honesty, discipline, quality, ambition, loyalty … character.” Vanguard’s position as a company “that stands for something” is clear in our research.
Salim Ramji underscored that very status when he became CEO on July 8 last year. The company released a one-minute video of Mr. Ramji, where he said: "It's our unique structure and our client-focused mission that make Vanguard like nowhere else."
Among other areas, he said his leadership would prioritize "stewarding the company's culture." He vowed the firm "will never deviate from Jack Bogle's original focus on taking a stand for investors."
This SEC order reveals a clear deviation from Bogle’s “original focus”. What should Vanguard do?
Conventional wisdom urges Vanguard stay mum. Don’t draw attention to the SEC order. Vanguard’s Netanel Spiro appeared to take that cue with a typical PR response: “We are pleased to have reached an agreement to put this matter behind us.”
The SEC order may be behind Vanguard, but the ethical and management issue still screams loudly. Which is why I'm making an appeal to Mr. Ramji now.
You can win back client trust. Speak to the crew. Speak from your heart. Tell the truth how mistakes were made. Explain what you will do so this never happens again. Be specific and clear.
Let your loyalty to Jack Bogle’s mission show. You will be forgiven if you show the crew that you will right this wrong ... That you will keep Vanguard “Like nowhere else.”
Knut Rostad is co-founder and president of the Institute for the Fiduciary Standard, a not for profit dedicated to furthering fiduciary principles in investment advice through education and advocacy.
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