This Ain’t John Bogle’s Vanguard: Morningstar’s Rekenthaler

The fund giant built on serving any and all investors with well-run, low-cost passive mutual funds may have lost its way, according to John Rekenthaler, vice president of research at Morningstar.

Client service has been declining at Vanguard, and even more disturbing, writes Rekenthaler, are recent developments at the firm’s Personal Advisor Services platform, which provides online and phone-based advice from a financial advisor for a 0.30% annual fee and requires a $50,000 minimum.

PAS recently introduced three actively managed “Advice Select” funds for PAS clients, not to all Vanguard clients, and the platform has plans to expand access to private equity funds to accredited investors and qualified purchasers early next year.  Currently only a small group of PAS clients have access to private equity. 

“Private equity funds directly contradict Vanguard’s existing brand, being costly, complex and illiquid rather than cheap, simple and easily traded,” Rekenthaler says.

He’s even more surprised by the Advice Select funds, which remind him of the exclusive offerings sold by Wall Street wirehouses around 1990, when these firms marketed their in-house funds only to their advisors’ clients.

“The strategy that carried Vanguard through its first 40 years appears to have reached its breaking point,” Rekenthaler writes. “A Vanguard that offers private equity investments and an advisory service that features exclusive funds isn’t Jack Bogle’s Vanguard.”

Asked about Rekenthaler’s critique, a Vanguard spokesman emailed a statement to ThinkAdvisor noting that the firm’s “client-owned structure [through which investors own the funds that own the company] lays the foundation for our enduring principles, values and strategy, all of which are predicated on putting the interests of our more than 30 million investors at the center of everything we do.”

Vanguard added that it continues to respond to the “preferences and needs” of clients, increase the number of investments it sells, introduce “new and improved online resources designed to assist clients who overwhelmingly prefer to transact online,” reorganize “client service teams to deliver more impactful, seamless and consistent service.” But it also recognizes “there is more to do” and is “committed to continuing to evolve and improve.”

Rekenthaler concludes that the jury is still out on whether Vanguard has lost its way or has just adjusted to a highly competitive climate in which more firms imitate Vanguard’s low-cost approach but have deeper pockets and higher margin businesses to subsidize their index funds and finance rising technology costs.

“Despite the firm’s sales success, Vanguard’s business has been squeezed,” he explains.