Vanguard's index trackers are dirt cheap but not yet widely available.
As most readers will by now be aware, the arrival in the UK of low-cost American fund giant Vanguard has transformed the cost of investing in one of the Fool's all-time favourite investments -- the index tracker.
But it's fair to say that in the eyes of many investors, Vanguard's arrival has caused some confusion, with one fundamental question cropping up again and again.
As comments left by readers of previous Fool articles where I've touched on Vanguard's offerings have made clear, many investors are struggling to understand how to actually invest in a Vanguard tracker. Unlike most tracker providers, Vanguard doesn't sell directly, and most fund supermarkets don't offer Vanguard products.
How, then, do you actually buy Vanguard's fabled tracker? If you've a relationship with an IFA with access to one of the nine fee-based IFA-only platforms carrying Vanguard funds, there's no problem. You pay your money, and you make your choice: Vanguard, please.
But many Fools, understandably, are wary of IFAs. And so far only one retail platform has said it will carry Vanguard funds: Alliance Trust Savings, the savings arm of FTSE 100 investment trust Alliance Trust (LSE: ATST).
I spoke to Peter Robertson, head of retail at Vanguard UK, and some interesting perspectives on all this emerged. The really interesting news is that Vanguard's go-to-market stance may -- once again -- be ahead of the pack.
First, though, let's clear up the buying-direct issue. Vanguard, explains Mr Robertson, is owned by its customers. Simplistically, the Vanguard 'management company', which administers the investment giant's vast range of funds, exists solely to service Vanguard investors, and sells its services to them at cost.
In short, there are no other shareholders to pay profits to, and the business need therefore make no profits. And this has had a major bearing on how the company has approached the UK marketplace.
"We're new to the UK, and as a customer-owned business, any money we spend building the UK business will have come from our US customers," points out Mr Robertson. And Vanguard, he adds, owes a duty of care to those customers to be careful with their money.
"Even though Vanguard is best-known for 'retail-direct' selling, the safest low-cost option for entering the UK market is the one we're pursuing," he says. "Retail-direct is an expensive option to set up and deliver: it's something we ultimately want to do in the UK, but we need to be confident that enough people will use it."
In the meantime, if you want to invest in Vanguard funds, you have to go elsewhere.
Commission? No way.
Which brings us to fund supermarkets and their investment platforms.
As we've written before, the Financial Services Authority's Retail Distribution Review (RDR) is going to see some wide-ranging changes being made to the way that the financial services industry pays (and receives) 'hidden' commissions.
Philosophically, almost right from its inception in 1975, Vanguard has been against such payments, and won't pay them. As a result, Vanguard -- like HSBC -- believe that its approach to the market is 'RDR-ready'.
The major fund supermarkets, though, are anything but RDR-ready. Their entire business model relies on charging investors nothing to buy funds, and then receiving a 'trail commission' from the funds in question.
In short, from a fund supermarket's point of view, offering Vanguard funds makes no sense, because they would earn no revenue from it. Worse, if investors switched out of funds that paid a commission and into Vanguard funds that didn't, they'd be materially worse off.
Of the fund supermarkets that Vanguard approached, only Alliance Trust was willing to carry its funds -- even though Vanguard wouldn't have paid them any money. Alliance's stance, believes Mr Robertson, owes much to its heritage as an investment trust: many of its customers are also shareholders, and why shouldn't Alliance act in the best interests of its own shareholders?
So near, yet so far
An impasse? Not quite -- or at least, it depends who you talk to.
One fund supermarket came close to signing on the dotted line, reveals Mr Robertson. And talks have continued -- on and off -- ever since, he adds. He's not at liberty to name the platform in question, but describes it as 'a very customer-driven business'. And some of these customers, it seems, have been asking pointed questions as to why they can't invest with Vanguard.
Now, from the clues presented, I think I've identified the fund platform in question. This week, I've spoken with them, and it's clear that -- for public consumption at least -- they aren't going to change their stance.
Clearer charges hold the key
Here's what I think is going to happen. RDR is undeniably going to make charges more explicit -- a move that Mr Robertson endorses.
"Our argument is that platform costs should be clearer -- and then investors will have a better-informed choice about which platform to use," he points out. "Longer-term, investors will be paying something to the fund manager and something to the platform -- rather than just something to the fund manager, a unknown proportion of which comes back." Overall, he emphasises, investors should be paying less, but they'll be paying two lots of fees, not one.
And my guess is that as RDR-mandated changes come closer, fund platforms will see the wisdom in jumping the gun. In short, expect Vanguard funds to become rather more widely available -- but expect also to pay your fund platform of choice for the privilege of buying and holding Vanguard funds through them.
Will Vanguard's own direct offering be available by then? We'll have to wait and see.
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