Financial advisors who once shunned Vanguard Group because it didn’t pay commissions are now among the fund giant’s best customers.
Money from brokers and independent advisors accounted for about 50 percent of the $225 billion Vanguard has brought in this year, topping cash from individuals or retirement plans, according to company data. While Vanguard is often associated with mom-and-pop investors and 401(k) accounts, this group of professionals now accounts for about a third, or $1.3 trillion, of the firm’s assets. That’s as big as its individual investor business, the traditional leader.
The wave of investments comes as several forces are shifting the mutual fund industry, making it more competitive. Customers have become more aware of fees. Wealth managers are under scrutiny over how they’re paid. And the low-cost, passively managed index and exchange-traded funds Vanguard pioneered have generally outperformed actively managed, more expensive counterparts.
“Advisors are looking to get the right asset classes and trying to get it at a low cost,” Vanguard Chief Executive Officer Bill McNabb said in an Oct. 18 interview with Erik Schatzker on Bloomberg Television. “You have got to think this is more than a cyclical thing.”
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Vanguard’s success in attracting money from advisors with its low-cost approach is facing increasing challenges. Earlier this month, BlackRock Inc. cut prices on 15 ETFs aimed at buy-and-hold investors and two days later Charles Schwab Corp. slashed fees on five ETFs. In many investment categories, Schwab is now cheaper than Vanguard. Schwab’s mid-cap ETF charges six basis points, while its rival’s costs eight basis points.
That strategy puts pressure on companies’ bottom lines. On Oct. 18, BlackRock reported revenue fell 3 percent in the third quarter from a year earlier even though assets under management surged to $5.1 trillion, a 14 percent jump.
Advisors are a sales target for mutual fund providers because they control an estimated $19 trillion, according to a May report from Aite Group, a consulting firm based in Boston. Vanguard’s unit dedicated to them serves advisors and wealth managers at banks, brokerage firms and registered investment advisors.
Historically, Vanguard did little or no business with the group. That’s because advisors generally earned commissions on the securities and funds they sold to customers and Vanguard didn’t pay such incentives.
Thomas Rampulla, who heads Vanguard’s advisor unit, started there when the business was first formed in 2002. “I was the head of sales, which meant I was the head of no one,” he said in a telephone interview.
Over time more advisors have shifted to a fee model and away from commissions amid regulatory scrutiny over the costs charged to investors in retirement accounts. Today, 70 percent of advisors get at least half their compensation from asset-based fees, up from 65 percent two years ago, according to a 2016 study by Cogent Reports, a Cambridge, Massachusetts-based research firm.