Vanguard Gets An Earful
Critics and customers fear the firm has lost some of its idealism
When it comes to simple investing for the small investor, there's no easier choice than Vanguard.
After all, the Valley Forge, Pa., mutual fund company was founded by John C. Bogle, who is sometimes called "Saint Jack" for his outspoken views and selfless assistance to small investors. Analysts at the fund tracker Morningstar recommend more Vanguard funds than any other. And Vanguard wins praise--as well as the personal savings--of such investor champions as former Securities and Exchange Commission Chairman Arthur Levitt; Mercer Bullard, founder of Fund Democracy; and Barbara Roper, financial services expert at the Consumer Federation of America. "Vanguard has a culture of integrity and low fees," says Levitt. "And I recommend low-expense-ratio index funds. If I preach it, I ought to practice it."
With those kinds of endorsements, it's no wonder that fed-up investors have been stampeding to Vanguard since the bear market and last fall's industry scandals. So far this year, Vanguard has taken in nearly $24 billion in new money--more than 2 1/2 times the amount it reaped in the same period last year and an all-time high for Vanguard. "For now, at least, the good guys are winning," says Jaime Punishill, a fund industry analyst at Forrester Research.
But can that continue? Some of Vanguard's biggest fans are starting to worry that the nation's only truly mutual fund company--Vanguard redistributes profits back to individual fund holders through lower expenses--may not be able to maintain both its growth and its ideals.
Morningstar research director Russel Kinnel still favors Vanguard, saying it "is doing a great job. They are still one of the best values. I still have money in Vanguard." But he has noticed "big changes in the company's approach."
Vanguard is clearly feeling growth pains. The influx of new customers has overwhelmed its staff. The average time a caller to Vanguard spends on hold has more than doubled to nearly four minutes since last year. That dropped Vanguard two slots to eighth out of the 10 biggest fund companies, according to the most recent ranking of telephone service by Dalbar Inc. Vanguard's Web site is also showing strains, freezing up or crashing during transactions, some customers say. In a complaint filed with the Securities and Exchange Commission and other regulators in December, an ex-employee has described a dysfunctional and chronically understaffed customer service department that can't help but give short shrift to small investors as it tries to meet orders to cultivate wealthy clients. "Vanguard tries so hard to get costs down, and has kept staff levels so low, that service levels are suffering," says Doris "Dee Dee" Havens, who says she was fired from a Scottsdale, Ariz., call center in February after trying to E-mail her complaint to coworkers.
Vanguard says the recent service snafus are just temporary and already being addressed. The company has marshaled its "Swiss army" of executives--from chairman John Brennan on down--who take shifts on the phones while hundreds of new employees are being trained to handle the 1 million new accounts opened in the past year.
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