Assessing The Competition

Matt, I think everyone’s watching Vanguard’s move into the UK very closely.

There are a number of questions that come to mind when assessing the strength of their competitive position and the likely success of their venture.

First, as they’ve clearly stated their intention to work through the fee-based independent financial advisor (“IFA”) community, how quickly will this area of the market grow? For all the talk about a shift away from commission-based advisory work, I see that Vanguard itself has estimated that still only 5-10% of UK advisers fall into the fee-based category.

And although there has been a great deal of talk and analysis about how important the UK regulator’s Retail Distribution Review is for moving the advisory industry towards more transparent fee-based activity, there remain sceptics as to whether this will actually work. The FSA hasn’t completely banned commission-based remuneration, and I’ve seen similarly-trumpeted initiatives fail in the past.

Second, while you and I know how big Vanguard is in both the indexing and ETF business in the US, how well does anyone know them this side of the Atlantic? We can assume, I think, that the low-fee nature of their funds means that they are not going to be throwing huge advertising dollars around. Having said that, perhaps the general level of public cynicism about financial services companies means that those who don’t advertise much may be seen in a better light!

Third, are they going to enter the European ETF business as well, or just stick, for the time being, to index funds? In the US they are in both markets, but if they enter the ETF business here, too, are they going to try to operate throughout Europe?

Fourth, how competitive will their products really be? You pointed out, Matt, that at a headline fee level Vanguard’s funds undercut the comparable ETFs. But, if you have less than £100,000 to invest in a single fund (i.e. you are one of the vast majority of investors) you will have to buy the Vanguard fund from an independent financial advisor “platform”, such as Transact, Ascentric, or Raymond James. Here, one leading platform provider charges 0.5% per transaction, plus an annual fee of 0.45%, although there may be discounts available if you have a large portfolio, or if you team up with particular IFAs (you’ll have to pay their fees, too, of course). Having said that, there are fees to pay if you buy ETFs, too, including the commission you pay to your broker on purchase, and possible custody fees on top.

Then there’s Vanguard’s initial fund charge, which applies to seven of the 11 funds to be launched on 23 June, and which is intended to protect existing investors from dilution. ETFs, of course, have no dilution levy, but they do have a bid-offer spread. ETFs have intraday liquidity, as well, though for long-term buy-and-hold investors this may not be such a big deal.

I’m interviewing Tom Rampulla, Vanguard’s CEO in the UK, next week, so I have plenty of questions to ask him.

To me, if Vanguard has one big competitive advantage, it’s the firm’s mutual status, which allows it to plan longer-term than its competitors, who are generally under shareholder pressure to produce immediate results. So when I spoke to one ETF market observer to ask his opinion on the US firm’s arrival, he said that, while he thought Vanguard’s lack of name recognition might make it tough to make a big splash for the first year or two in terms of asset gathering, they would stick to their plans and succeed. And, speaking as an investor in passive tracker products, the arrival of a major new competitor like this can only be good news.

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