Vanguard to Change Fee, Trading Methodologies on Advice Accounts
Vanguard Group is making core changes to its methodology for collecting fees and executing trades in its rapidly growing “Personal Advisor Services” unit, which offers low-cost access to salaried advisors and model-based financial plans.
As of October 21, the business will assess and deduct fees from client accounts on a 90-day rolling schedule, based on when each client’s financial plan was implemented, the company said in emails customers began receiving this week. PAS assets have exploded to about $179 billion since inception less than five years ago, and were up as of July 31 by 51% from the end of 2019.
The fee-scheduling change will be “beneficial from both a systems and trading perspective in that it spreads out our trade volume generated from fee transactions across all business days of a year rather than having those trades executed for all clients based on the end of the calendar quarter,” spokesman Charles Kurtz said in an e-mail.
He did not comment on whether Vanguard has experienced end-of-quarter trading or processing issues on the discretionary trades it makes, or on pricing improvements it expects for customers. The fees themselves are not changing.
The shift to a rolling assessment does not affect self-directed clients at Vanguard Brokerage Services, the firm’s discount broker, or those who use the Digital Advisor “robo” version of PAS. Some self-directed investors at Vanguard and other discount firms have experienced delays in accessing their accounts on heavy volume days in the past year.
The mutual fund giant does not disclose the number of its PAS customers, but over the past several months has asked them to complete new account documents authorizing investments in exchange-traded fund share classes of the four basic Vanguard funds the program uses—the Total Stock Market Index Fund, Total International Stock Index Fund, Total Bond Market Index Fund and Total International Bond Index Fund.
The shift to ETFs is aimed at lowering tax costs for customers, according to Vanguard.
“The new methodology will sell positions in a manner that seeks to maintain a client’s recommended asset allocation while minimizing the tax implications of those trades,” Kurtz said. “This will be accomplished by utilizing our portfolio construction engine to determine where to raise the cash to cover the fee.”
Morgan Stanley this year shifted advisory account billing to accounts from a quarterly to a monthly basis in what it said was an attempt at better disclosure, but pricing consultants said such changes are rare because of the disruption to advisor and client expectations and the need to realign internal billing systems.
In addition to changing its fee scheduling and trade-timing methodologies, Vanguard also will begin matching PAS orders internally.
“[B]eginning on or after October 21, 2020, when trades are aggregated, we’ll begin using a practice called ‘cross trading,’ which seeks to minimize transaction costs for advised clients,” Vanguard wrote to its PAS customers. “This practice refers to the process of matching client buy and sell orders of the same security, which permits us to avoid sending those trades to the market for execution.”
The notice to customers did not explain why Vanguard has not earlier adopted the technique, which is common on Wall Street. Vanguard’s most recent PAS regulatory brochure dated March 30 does not mention the planned price scheduling or trading changes.
It does say that Vanguard’s broker-dealer sends PAS option trades to third-party execution firms, most of whom pay for the order flow. The firms are Citadel Execution Services, Citigroup Global Markets, UBS Securities LLC, and KCG Americas LLC. A fifth firm, Bank of New York’s Pershing LLC, does not pay for order routing, the brochure said.
Vanguard itself does not pay broker-dealers for listing its core product, mutual funds, on their sales distribution platforms, a stance that has led some major firms to exclude sales of the low-expense funds.