Vanguard Gets An Earful
Critics and customers fear the firm has lost some of its idealism
Makeover. That will help, but Daniel Wiener, editor of the Independent Adviser for Vanguard Investors , who worked for U.S. News from 1987 to 1991, warns customers not to expect too much improvement. "Vanguard says you can pay less and still get the best service, but that's not true," he says. "They've got to be saving money somewhere, and some of the places they save it is in hiring, salaries, and the Web."
More troubling to customers and fans, however, are subtle changes in policy and style that seem to conflict with the idealism and no-nonsense investing style of Bogle. Vanguard's founder hasn't had a management role since his forced retirement in 1996, but he continues to preach his investing gospel at congressional hearings, press conferences, and industry get-togethers.
But Bogle's handpicked successors have fought many of the reforms Bogle has championed recently. Last year, Brennan opposed a Bogle-backed initiative to force fund firms to tell shareholders how they vote on their behalf on such matters as directors and fees paid to outsiders. The SEC eventually enacted the proposal over the industry's objections. Brennan is currently fighting attempts to require Vanguard to reveal his and other executives' compensation, as well as proposals that would require him to step down as chairman from all of the boards of Vanguard funds.
That bothers customers like Levitt, who says "on governance issues, I am solidly with Bogle," and the CFA's Roper. "I do see a difference in tone," she says. "Stylistic changes make you worry about substance changes."
Investor friendly. Noting that Vanguard already publishes the rules by which it votes proxies and that its fund boards are dominated by independent directors, Vanguard officials insist they oppose rules that would unnecessarily add costs and thus cut investors' returns. "We're always on the side of the investor," says Brennan. "Whether it's a popular [stance] is a whole different issue. We know in our bones what's right for investors."
Some knowledgeable observers are worried that Vanguard may be veering from the boring but successful indexing strategy that Bogle and Vanguard board member Burton Malkiel made famous. Malkiel, a Princeton economist, has shown that an index fund made up of stocks of every public company in America outearns the vast majority of funds run by active managers. And Bogle's main claim to fame was putting together what were the first--and are still the cheapest--index funds.
But Brennan recently launched several new sector funds to augment those started by Bogle in the 1980s--much to Bogle's dismay. "Sector funds are losers for investors," says Bogle, who is careful not to criticize current management. "I made the awful mistake of starting a bunch of sector funds in 1985, and I am man enough to admit my mistake."
What's more, customers who ask Vanguard for a financial plan today are usually told to put only about half of their cash in index funds. The other half is directed to actively managed funds. That confounds indexing fans like money manager Roy Weitz, founder of FundAlarm.com: "You used to be able to put your guard down with the old Vanguard. But they are turning into just another big financial services firm, and now you have to protect yourself, even from them."
Catherine Gordon, who heads the Vanguard research group that develops the planners' recommendations, says managed funds buffer investors from downturns. For his part, Malkiel advises people to put a higher percentage of their money in indexes and just "do a little active around the edges." But he says he's happy Vanguard promotes even a 50 percent allocation to indexes, since that is more than triple the average investor's stake. He vehemently denies that Vanguard is straying from its core values. "I am absolutely convinced there has been no divergence from the wonderful ideals that Jack Bogle set up," he says.
And to the extent that Vanguard is changing, even its toughest critics admit the company has lost little of its aura. Despite her firing, ex-employee Havens still thinks Vanguard is better than the competition. "My friends ask me: `So what do we do with our money?' The problem is that I don't know anybody who is doing a better job."
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