Vanguard’s Winds Of Change Quite Chilly

January 16, 2020

I’ve been investing with Vanguard for nearly three decades now. Though a long-standing fan of its low-cost and diversified funds, I’m becoming less comfortable with some of the changes I’m seeing.

I noted my concerns about Vanguard without its founder, John Bogle, whom I suspect would not have approved of the new commodity fund. The Wall Street Journal wrote that Vanguard is considering a private equity fund, just as my clients who happen to be general partners of PE funds, are telling me too much money is chasing too few deals. And Vanguard’s timing on abandoning the objective of its precious metals and mining fund just before the asset class surged shows why market timing can fail. Funds that stuck to the objective, like the VanEck Vectors Gold Miners ETF (GDX), skyrocketed.

Yet the biggest scare of all for me occurred when I logged into my own Vanguard account a couple of times last month and was shocked to see this pop-up advertisement congratulating me, confetti and all, for qualifying for Vanguard’s Personal Advisor Services (PAS). I’m a winner!

I understand that pop-up ads are a way of life, and just about all online media is supported by advertisements. But I’m one of the 30 million owners of Vanguard, and I object to this ad making me go through an extra step to see my accounts from a company in which I’m already an owner.

Further, it’s rather extreme marketing to congratulate me for what essentially is winning the ability to pay Vanguard well over $10,000 a year more than I do now.

One of my favorite quotes from the late John Bogle was, “you get what you don’t pay for,” so I regard this ad as Vanguard congratulating me for the opportunity to get less.

I Love Vanguard PAS

Though it may seem like I’m arguing with myself, let me explain. I agree with Vanguard’s online Q&A that “successful investing can be simpler than people think.” After all, I worked with my son when he was 8 years old to develop a simple three-fund second grader’s portfolio. The ETF versions of the three funds are as follows:

It stood the test of time as the top-performing Dow Jones Market Watch Lazy portfolio, though it was also the most aggressive.

On the other hand, I also agree with Vanguard that many people should not be managing their own portfolios, as emotions can get in the way, or even cognitive decline may dictate.

I’ve recommended Vanguard PAS many times to people, and feel that both the fees and funds used are better than the vast majority of AUM advisors I’ve seen. Vanguard uses these three funds, as well as a few others, such as the Vanguard Total International Bond ETF (BNDX).

And I agree with Vanguard that there is value in advice.

Yet according to Figure 4 of this recent Vanguard paper, every investor profile—from “aggressive risk takers” to “cash dwellers”—is moved to moderate risk portfolios averaging about 60% equities. This was brought to my attention by advisor Rick Ferri. So, it’s pretty close to what I call a moderate risk, second-grader portfolio, though it has more international and other bond funds.

I certainly don’t think everyone should have a 60/40 portfolio. Stephen Utkus, principal and director of the Vanguard Center for Investor Research, pointed out these are averages and equity allocations typically range from 35-65%.

In addition, I don’t always agree with PAS advice. Will Vanguard PAS tell clients to pay down their mortgage if the client has enough liquidity and owns fixed income in their taxable accounts? Vanguard responded that “any recommendation would be based on the advisor’s understanding of the client’s personal situation.”

I feel strongly that it’s unwise to borrow money (mortgage) at a higher rate than one lends it out for (bond fund), especially under the new tax law where one may be getting little or no tax benefit while they are paying taxes on the bonds.

Bottom line

Vanguard PAS uses very good low-cost funds and implements asset location to maximize tax efficiency.

When stocks tank, I suspect they will stay the course and not time markets poorly like advisors did during the real estate/financial bubble.

I will continue to recommend Vanguard PAS to people who don’t want to self-manage or I don’t think should be managing their own portfolio. And though I understand Vanguard’s CEO Tim Buckley’s goal to convert 20% of retail investors to PAS, this marketing still goes too far to reach that goal, in my view.


Allan Roth is the founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for the Wall Street Journal, AARP and Financial Planning magazine. You can reach him at [email protected], or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter.

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