Frank Talk With Vanguard’s Advisory Chief

One of the small compensations for journalists attending investment conferences, where panel discussions can at times degenerate into speakers starting to sound a little too alike, is the ability to meet with executives in a side lounge and maybe get a fresher perspective.

It’s not that Martha King, the head of Vanguard’s advisory business, dropped any news bombs during our sidehall meeting at IndexUniverse’s Inside ETFs conference. King is too smart to be induced to say something that should be protected from industry competitors. (She politely bypassed my question about the financial terms of Vanguard’s new licensing agreements with the CRSP and FTSE indexes.)

But there’s less guardedness in a face-to-face meeting and that just makes it easier to cut through the formulaic responses one comes to expect from the various sages on stages.

About those new indexes, for example. Vanguard shook up the indexing universe in October when it announced it was ending its relationship with MSCI as the provider of indexes for 22 of its ETFs, switching instead to University of Chicago-affiliated CRISP and the Financial Times’ FTSE indexes.

While trumpeting the firm’s smooth execution of the transition, she frankly acknowledged there were some clients who complained and wanted to move on to what they regarded as greener pastures. She said the firm anticipated this from the outset as a consequence of a business changing vendors.

The move was planned long in advance. “Vanguard doesn’t do anything precipitously,” King said.

While Vanguard made it clear the move was aimed at maintaining the firm’s vaunted low-cost value proposition into the future, King was—once again—quite open about the unpretty sausage-making process in the ETF world:

“There has been a shift in power toward benchmark providers and they have been increasing the fees that they charge, particularly in a market where discernible differences are harder and harder to find,” the Vanguard executive said. “Usually where that happens in an industry, prices come down. But that has not been happening here.”

With the change in index vendors, “we now have cost certainly,” King said. (It was here that she declined my question on how much those costs were and for how long they could be expected to remain.)

On another cost-related issue—that of rival Charles Schwab Corp.’s newly launched commission-free trading platform—King was dismissive of the value being offered.

“Whether you’re talking mutual funds or ETFs, nothing’s free, somebody’s paying.

“Take a look at what products are on that platform; it’s not best of breed.” She asked whether an investor wanted something free or would rather have a “best-in-class product and pay a small cost to trade it.”