Why some Vanguard investors miss the old days

In 1980, Louis Franzini put his early Philadelphia National Bank retirement savings into what was then the 5-year-old upstart Vanguard Group. He says service got better for a long time. But lately, for him, it’s been getting worse.

Franzini liked plainspoken Vanguard founder John C. Bogle’s low fees, its funds tied to popular stock indexes instead of high-paid fund managers’ uneven selections — and the Saturday hours at the company’s retail office in Chesterbrook near Valley Forge Park. As his household savings accounts topped $1 million, he qualified for Vanguard Flagship service, with a regular representative he could call for questions and to resolve any issues. In time could write checks, automatically direct dividends, and enjoy other banklike services at no additional fees.

Most of those services evaporated in recent years or were no longer available for free (a dedicated Vanguard rep would now cost him more than $3,000 a year, according to the company’s price chart). Vanguard has also closed its walk-in offices.

But it’s only this summer, Franzini, a Montgomery County retiree, says that he has becomes “really outraged” by the latest change in a long relationship: The Malvern-based investment giant has obliged him and other longtime customers to switch their familiar “legacy” Vanguard fund accounts by Sept. 1 to a Vanguard brokerage account, or pay a string of new fees on each account. Vanguard has also moved to charge clients for continuing to receive paper statements by mail.

Why the changes, and why now?

“Our goal is to encourage clients to take advantage of a more modern platform and spur greater digital engagement,” spokesperson Karyn Baldwin said in an email reply to Inquirer questions.

According to Andrew Kadjeski, head of brokerage and investments, that digital engagement includes “two innovative cash offers and a new and improved mobile app.”

The company declined to address how many customers were being switched or were paying the new fees instead and said it would refund the fees for anyone who switches by Nov. 1.

Vanguard has grown a great deal since its early investors were attracted by Bogle’s simple style and the features the company added in earlier decades.

Buoyed by marketing and its reputation as a low-cost provider, Vanguard invests more than $8 trillion in clients’ money and has grown far faster than its older rivals. The firm is second only to BlackRock among U.S. investment companies targeting the mass market. Vanguard has continued to grow in recent years as many of its rivals struggled.

The company says it serves 50 million investors and employs 20,000, more than half of them based at its headquarters in Malvern and offices in nearby communities.

Stephen Hartley, a retired Drexel, Stockton State, and Rowan University computer science professor, has been an investor with Vanguard for most of the firm’s history. He also recalls fondly when his account entitled him to the Flagship service and a “dedicated representative,” plus check writing, direct deposit, directed dividends, and other services at no additional cost.

The account hasn’t changed, but the extra services have “all gone out the window,” said the South Jersey resident.

Hartley invested with Vanguard — money market, taxable funds, traditional and Roth IRAs, his wife’s accounts — starting in 1985, when he was a University of Virginia graduate student. He said he was attracted not only by low fees and the resulting higher returns, but also by what he called Vanguard’s “unique corporate structure, compared to other fund companies.”

Unlike its founder-owned or publicly traded rivals, Vanguard told investors its shareholder-owned mutual funds owned the management firm that ran the funds, enabling them to provide services “at cost,” with savings flowed back to fund shareholders.

Under founder Bogle, Vanguard didn’t even offer brokerage accounts; he discouraged frequent trading. Bogle retired in 1996; the company added products, and growth accelerated.

Especially after investing slowed amid the 2001 and 2008 stock market crashes, big competitors like Fidelity and Schwab responded to Vanguard’s growth by cutting fees on popular funds. Vanguard automated services and cut other costs to keep its competitive edge.

In 2018, Vanguard canceled check writing and other bank-style services for its fund customers, noting that relatively few investors used them. Hartley also lost his personal Flagship representative, as Vanguard withdrew that service from investors his size, instead offering phone access to members of a team, then a growing list of its own paid advisory services.

Hartley said he’d be penalized if he declined the switch from his “legacy” Vanguard mutual fund platform to Vanguard Brokerage, with new fees that he says add up to $175 a year for services that he formerly got for free.

He made the switch but found “it was a lot of work,” taking many hours and extensive documentation, as if he were changing banks. He said he can no longer have dividends automatically sent to the funds he wants; that now requires an extra step each time.

More than the inconvenience, Hartley said the changes have left him questioning what he thought he knew about the company and how it was different from others.

“I wonder why they are doing this,” he said. “They used to crow about their unique corporate structure, how any cost reductions flowed back to the funds, and ultimately to the clients.”

In recent years, the company has stopped using language that states it operates “at cost,” Hartley said. (The change in language followed Bogle’s death in 2019 as well as legal challenges related to former Vanguard tax attorney David Danon, who accused the company of breaking tax rules to minimize federal and state income tax obligations. Vanguard has called Danon’s claims that he was fired in retaliation “without merit.” When it stopped advertising “at cost,” the company called it part of an effort to simplify marketing materials.)

“At-cost management was one of the features that drew me to Vanguard,” Hartley said. “The bottom line is, I feel I’m getting less services than 10 to 15 years ago.”

And yet, like Franzini, he’s not about to leave Vanguard. “I’m not going to T. Rowe Price or Fidelity — that would be more inconvenient,” Hartley said.

In its long push to guide longtime million-dollar customers toward brokerage and away from its old banklike accounts with extra services, Vanguard is emulating its longtime rivals such as Fidelity, Schwab, and E-Trade, said Jeff DeMaso, of the Independent Vanguard Adviser newsletter.

“In theory, there isn’t anything to fear about switching,” DeMaso wrote in an article for his Vanguard-investor subscribers last month. Yet in practice, the switch “has been a nightmare,” he added, citing investors who complained of delays, missed distributions, and seemingly endless paperwork — though he acknowledged that customers who made easier transitions were unlikely to call him about it.

DeMaso said Vanguard, with its millions of customers, should have made the transition smoother. More generally, longtime investors “feel nickel-and-dimed,” DeMaso told The Inquirer. “They are frustrated with the decline in service,” which he called a “result of Vanguard growing so quickly.”