Vanguard’s Rampulla On New Advisory Rule

Vanguard’s Rampulla On New Advisory Rule

Best interest of the client is usually centered on low costs, but not always.

Reviewed by: Drew Voros
Edited by: Drew Voros

Thomas Rampulla is principal and head of U.S. Financial Intermediaries at Vanguard. He is responsible for business unit strategy and oversees business development, relationship management and daily operations for more than 1,000 financial advisor firms that entrust over $1 trillion in assets to Vanguard. recently spoke with Rampulla about the new Department of Labor’s fiduciary rule, how it could impact advisors and the way they serve clients. When someone new comes to Vanguard, how do you know what their need for an advisor is, what the right fit is?

Tom Rampulla: It’s really hard to say whether they should get an advisor at Vanguard or not. When someone's thinking about advice, what advice is most appropriate for them varies.

If you look at the spectrum of advice, you have on one end the low-touch, sort of prepackaged, scalable advice that’s often what you get in your 401(k) plan, such as a target-date fund: “I know my age, I know about when I'm going to retire. I don't want to manage it. Help me out with that. I don't want to be hands-off, but I don't necessarily want a full-touch advisor, nor may I need one.” That's the one end of it.

The other end of it is very complex, such as private-banking-type services where there are trusts, estate planning and a lot of tax planning. So there's a huge spectrum, and the market's somewhere in between.

You have to assess what your needs are; how complex they are; what their desired outcomes are; what your preferences are when it comes to an advisor. Do you want to work with someone virtually? Or do you want to sit across the desk from someone? You have to go through a process to determine what's important to you, and then start thinking about what offers are out there. Let’s talk about the Department of Labor’s new fiduciary rule. Vanguard was a big proponent of some changes the DoL made. What are your thoughts, and as an advisor, what is the kind of adjustment they need to be thinking about, if any?

Rampulla: The DoL listened to the marketplace and was able to balance its objectives with making the new regulations workable, operational. I credit it for listening to the marketplace. I don't think you want to blow up the advice market completely, because it's really valuable. Depending on which version you look at, it could have been pretty unworkable.

As an advisor, what you have to do is think about how it might impact you. First of all, what types of clients do you work with? Are you providing advice on IRAs or 401(k) plans? If so, then the rule likely applies to you. And if you get remunerated, it definitely applies to you. If you or an affiliated firm receives some sort of compensation based on what you do for the client, it likely applies to you.

Then it goes to what you do for the client. Are you providing some sort of recommendation? If so, it applies to you.

You have to think about the higher standard of the fiduciary rule. It's not about appropriateness anymore; it's really about working in the best interest of the client. You really have to think about the advice you're providing: Is it truly in the best interest of your client? That's a pretty high standard. You have to take into account investment objectives, time horizons, fees and the way you're compensated.

As an advisor, you have to think about how you're documenting your process so that if it's called into question, you can point to something and say, "Look, at that time, here are the circumstances."

And then you have to consider fees, and the way you're compensated. That's a pretty significant part of the equation now, probably more so than ever. It's OK to not be fee-based, but, boy, the standards are pretty high in showing that that is in the best interest of the client. The burden is now on you to demonstrate that.

One thing you have to remember about the rule is that when it comes to standards for lawsuits, it's pretty easy for an advisor to face action against them. It can happen in any state; it's not necessarily at the federal level anymore. That probably cranks up the risk profile for an advisor—they’ve got to have good processes.

Being a fee-based advisor makes it a little easier. If you're a fee-based advisor, you're pretty well aligned with the client. You're looking at cost. And if you move somebody from a transaction-based account to a fee-based business model, you have to prove that's in their best interest. You may have a client who’s been in this account for a long time. There's very little turnover in the account. And frankly, a transaction- or commission-based compensation structure might be in their best interest. Does the new rule change the way an advisor discusses or proposes an active product, which is usually more expensive?

Rampulla: You really have to think about best interest of the client, and, all things being equal, low cost is better than high cost. But with the new rule, cost becomes a bigger part of the equation. And low-cost active should be pretty attractive to an advisor. In essence then, an advisor shouldn't be gun-shy in terms of proposing an active solution if its cost makes sense, right?
As they go through their process, active is perfectly fine. If the advisor believes—based on a situation that's in the best interest of their client—cost is part of that equation, just as risk level is part of that equation, how it fits in the portfolio is part of the equation. It's completely appropriate. Regarding Vanguard Financial Advisor Services, which you oversee, how did you grow that to help Vanguard assets grow so rapidly? How much is organic? How much of it is proactive?

Rampulla: I wish it was all organic. That would make a very nice story. My history is I helped Martha King start this business back in 2002. I worked with her until 2008, and then I went to London for seven years and started our U.K. business and ran the European business, and have come back to a much, much bigger business.

It is a very proactive effort on Vanguard's part to work with financial advisors. It's a small organization in terms of people, by Vanguard's standards—about 550 or 600 people in Vanguard Financial Advisor Services. A good chunk of those are proactive salespeople living in their territories, working with advisors every day to help them serve their clients. That's pretty proactive—getting the word out and educating. We spend a lot of time, effort and resources to help advisors with their clients.

Vanguard is appealing to advisors. There's the low cost/high quality and trustworthiness we are known for that is a pull on demand. But it's a competitive marketplace out there, so we have to make sure we're getting the story out to our clients and prospective clients. There are so many new products coming out: 50/50, dynamic hedging. And currency-hedged ETFs have been one of the fastest-growing segments in the ETF industry. Are these products for institutional investors and retail investors? And is it a zero-sum game in the long run?

Rampulla: We believe it is. We believe you're not going to add alpha through currency hedging. It washes out over time. That said, there are reasons investors may want to hedge. Institutional investors might have pension liabilities in a local currency, and it's important to do that.

Same with financial advisors and their clients—perhaps there are reasons they might want to take the currency volatility out of a strategy; maybe they've got a shorter investment time period.

There could be good, sound investment reasons to hedge your exposures. But we don't think there is incremental value to alpha over time; it's really about a hedge in matching asset and a liability, whether that's retirement payment for a pension plan or, “I'm retiring and I want to take payouts," or whatever.

We've seen over the last few years certain products have become really hot because of what's happening in the currencies. We don’t think that's not a good strategy to chase those short term.

Contact Drew Voros at [email protected].

Drew Voros has nearly 30 years' experience in financial journalism. He was a longtime business editor for the Oakland Tribune and sister papers of the Bay Area News Group, and finance writer for the Hollywood trade publication Variety. Voros' past roles have also included editor-in-chief at and ETF Report.