Vanguard price cuts rattle the brokers who sell its funds

By Jed Horowitz NEW YORK (Reuters) - The Vanguard Group, which in 40 years became the biggest mutual fund company by selling low-priced, market-matching funds, is competing with some of its best customers – the brokers and advisers who funnel client assets to its funds -- by offering personalized service to investors with more than $500,000. Making things worse for outside advisers, Vanguard is charging 0.3 percent of assets annually or less, compared with the 1 percent to 3 percent common among brokers and independent financial advisers. That's down from the 0.70 percent Vanguard used to charge. And the company has widened the pool of eligible investors to include people with $50,000 or more, down from the former minimum of $500,000. Some advisers said they can't compete with Vanguard's prices nor its marketing muscle. David Lewis, whose Resource Advisory Services in Knoxville, Tennessee, manages about $97 million, said he lost a client in April with an account of almost $2 million to Vanguard because of its lower fees and offer of a personal adviser. "We like to think we're doing more than they can do," said Lewis, 67, who offers advice about areas including retirement accounts, taxes and estate planning. "The gentleman said in his exit call that he really appreciates us but didn't need our level of service now that the big work was done." Vanguard said it expanded its advisory service because most of its customers seek retirement advice but aren't willing to pay the usual fees. The cuts reinforce the nonprofit company's mission to produce strong returns for investors through keeping operational and management costs low, company executives said. "Obviously there are going to be some advisers who think we are treading on their turf," said John Bogle, the 86-year-old founder and former chief executive of Vanguard told Reuters. "We've never been as directly competitive as this, but at some point you have to stand up for what you believe." The new program risks alienating the advisers at outside brokerages, banks and financial planning firms who last year were responsible for more than half of the record $214 billion that Vanguard collected from investors. In 2009, about 27 percent of Vanguard's $1.35 trillion in assets under management were funneled through banks, brokers and independent advisers, the company said. Today, about a third of its $3 trillion in assets came from those third-party salespeople. Vanguard officials say that its new Personal Advisor Services program won't compete with high-end advisers. The company's advisers talk to clients online or by phone, and offer a fairly bare-bones array of products and services. "Even if we win business that is up-market, it will be different from the in-person, high-touch guidance clients experience with advisers," said Martha King, who until recently ran Vanguard's third-party sales unit and heads its institutional division. "We are not going to be living in their communities." WEALTHIEST CUSTOMERS Still, many wealth managers are concerned that one day Vanguard will target their wealthiest customers. When it announced the advice service in May, its fee schedule ranged from 0.30 percent on assets below $5 million to as low as 0.05 percentage points for customers investing $25 million or more at Vanguard. Some also took personally a website promotion that said Vanguard is "reinventing financial advice to help you earn more, pay less and partner with an adviser who works solely for your benefit." "They are going after my clients," said Rick Ferri, an independent Texas-based financial adviser and blogger who touts Vanguard's philosophy of keeping investment costs low and says he has put more than $1 billion of client money into its funds over the last 15 years. "It's scary to have Vanguard do this," said Bill Hayes, co-owner of Kingston, Massachusetts-based advisory firm Charles Carroll Financial Partners. "I have a lot of clients' money there, and I'll pull it in a heartbeat if they start going after the smaller advisers." His firm manages about $43 million for 91 clients. Outside advisers may fret, but few plan to stop sending clients' money to the Malvern, Pennsylvania-based company. Ferri said he has a duty to invest client money in consistent, reliable funds at low prices, and that's what Vanguard and a few competitors provide. Ferri also said he is fighting back by offering a broader range of investments – including exchange-traded funds that Vanguard doesn't offer in its new program -- along with an advisory service that has different price tiers. King, the Vanguard executive, says the only advisers who might feel pushed around are those who have been shifting down-market to less wealthy clients. "The threat is greater there, but most of our advisers do not feel threatened by PAS and really shouldn't be," she said. Some advisers who spoke to Reuters agree. "They are going to fill a part of the market that is still overlooked or poorly served," said Chris Cordaro, managing partner of Regent Atlantic Capital, which manages $1.2 billion of assets and works with clients whose accounts average close to $3 million. "We bring a different value proposition. For someone who has $250,000 or $350,000, there are not a lot of good choices and Vanguard can help them." (Reporting by Jed Horowitz, editing by Dan Wilchins and John Pickering)