Vanguard Advisers Fined by SEC

A reader writes in, asking:

“I saw that Vanguard was recently fined by the SEC for not disclosing conflicts of interest in their PAS [Personal Advisor Services] program. PAS has been a favorite with Bogleheads and I believe you have written about it favorably as well. Does this change your opinion of the program? Or does it change your opinion of Vanguard in general?”

For anybody interested, here’s the official SEC document, and here’s the SEC’s summary.

Here’s a relevant quote explaining the situation:

This matter arises from Respondent’s failure to adequately disclose conflicts of interest in connection with its recommendation to prospective clients and existing clients (collectively referred to as “clients”) to enroll in Respondent’s managed account program known as Personal Advisor Services (“PAS”), a fee-based advisory service that provides clients with ongoing portfolio management of their accounts.

From August 2020 through December 2023 (the “Relevant Period”), Respondent’s performance review system considered, among other things, certain metrics that incentivized its financial advisors that serviced PAS (“PAS Advisors”) to enroll and retain clients in PAS. During the Relevant Period, Respondent failed to adequately disclose the conflict of interest that this incentive compensation system presented because certain disclosures contained contradictory statements about PAS Advisors’ receipt of incentive compensation.

[…]

Additionally, Respondent made misleading statements in marketing materials regarding PAS Advisors’ conflicts of interest, including that PAS Advisors received no outside compensation or financial incentives.

So, in short:

1. Vanguard PAS employees received compensation based on their ability to enroll prospective clients in the PAS program and retain existing clients in the PAS program.
2. And that creates a conflict of interest, which Vanguard did not disclose.
3. And Vanguard’s marketing materials were misleading because they said that PAS advisors did not receive financial incentives, which is inaccurate.

Disclosures and marketing aside, it’s not exactly surprising that the compensation of an advisor working for an RIA would be based at least in part on their ability to retain clients (or convert prospective clients into clients). If you’re on the phone with somebody from Vanguard Personal Advisor Services, discussing potentially signing up for Vanguard Personal Advisor Services, they’re probably going to try to get you to sign up for it. And if you’re already a client, the people at Vanguard PAS with whom you interact will probably try to keep you as a client. Neither of those conflicts of interest strikes me as especially problematic. And if either of those dynamics comes as a surprise to you, your level of skepticism for the financial services industry needs to be cranked upward by factor of 10 at least, otherwise you’re in for a world of financial hurt over your lifetime.

I don’t mean to make light of the importance of full, honest disclosures. In my own client practice, I spend a lot of time trying very carefully to make sure I’m following all the applicable rules. Vanguard failed to disclose something that they should have disclosed, and they got fined for it. I’m not sad to see the fine. But it doesn’t meaningfully change my opinion of Vanguard PAS (or Vanguard in general).

The disclosures regarding, and marketing of, Vanguard PAS are separate from the value proposition of the PAS platform itself. The Personal Advisor Services platform is the same as ever: 0.3% per year to rebalance your portfolio and provide what I’d describe as “light, portfolio-focused financial planning.” For lots of people looking for somebody else to manage the portfolio for them, that’s going to be a good fit. It’s also not for everybody.