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Is Vanguard too Big?

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Personally, I have had only one minor administrative error recently with Vanguard where they incorrectly deposited SEP-IRA money into my traditional IRA. I called them to explain their error, they pulled up the letter of instruction, recognized their mistake and made the correction. Problem solved.

With record inflows of more than $1 billion per day in 2017, or $369.3 billion, some investors are wondering if Vanguard’s success is a problem. I don’t think that’s the case. In a transaction oriented business there are always going to be mistakes. They can be corrected.

When I worked at Fidelity part of my job was correcting them. When the markets tanked the phones would ring, sell orders or withdrawal orders would be placed and the next day we’d dig through the mistakes. In any case, had Vanguard’s error on my traditional IRA spilled into next year there would have been more paperwork etc. to correct it, but it would have been resolved.

That’s the key. If it was caught. The takeaway for you is to make sure you spend the time to carefully review each and every transaction or have someone do it for you. In volatile markets transactions and emotions spike. The bigger lesson here is to make sure you pay attention to your portfolio because often times the problem escalates because of the emotions between the chair and the keyboard.

With this in mind, I read a story by Sarah Krouse in today’s Wall Street Journal about whether or not Vanguard’s success has become a problem. She writes:

Over the past year, sentiment expressed about Vanguard on Twitter has been less favorable than opinions about rival brokerage firms such as Charles Schwab Corp. and Fidelity Investments, according to Social Market Analytics, Inc., a company that uses information on social media to analyze how companies are perceived.

Issues flagged by Vanguard customers include incorrect cost basis information—what investors paid for shares in a fund—shown on their accounts, and problems with required minimum distributions for retirees, incorrect account balances displayed online, long customer service wait times and login troubles. Some of the problems identified by customers have the potential to trigger tax consequences for investors.

A company spokesman said “these are periodic systems issues unrelated to our growth.” He added that “Vanguard is increasingly focused on investing in the people and technology to serve our clients more effectively and efficiently, protect investor assets, and enhance fund performance.”

New Chief Executive Mortimer J. “Tim” Buckley, who took on the top job earlier this year, said in an interview at the time that Vanguard has invested to improve its customer service. His predecessor F. William McNabb III said in November that Vanguard had added 1,200 customer-service employees to a 5,000-person team. The firm’s processing backlog and wait times had improved, Mr. McNabb said at the time.

Vanguard isn’t the only investing firm to experience technical problems of late. Earlier this year, it was one of several brokerage and mutual-fund firms that suffered outages and slowdowns as market turmoil sent individual investors scrambling to access their accounts.

Few firms, however, can claim the same level of customer devotion as Vanguard. It started the first index fund for individual investors 42 years ago and is owned solely by its funds’ shareholders. Some customers, however, say that the recent technical challenges are a sign that the company is straining to manage its rapid growth.

“It’s kind of a shame that Mr. Bogle’s creation, which is extraordinary, has been somewhat sullied by their performance administratively,” said former Vanguard client Barry Bergsman.

The retired Los Angeles media and marketing executive said he experienced problems last year when he decided to move his Vanguard accounts to a more “hands-on” wealth management firm. Mr. Bergsman said he instructed Vanguard to transfer some fund positions to a custodian that would complete the account transition and instead those positions were liquidated, leaving him with a “substantial” tax bill.

He said Vanguard didn’t quickly resolve the issue and he lost patience, ultimately paying the tax bill.

Some Vanguard clients who have 403 (b) retirement plans have complained about administrative problems after Vanguard outsourced some of its record-keeping duties to the Newport Group in 2017. A spokeswoman for Newport Group declined to comment. A 403(b) plan is typically offered to teachers, clergy and some medical workers.

Chris Herbert, who manages four accounts at Vanguard including his wife’s 403(b) retirement plan, noticed last year that the value of his wife’s 403(b) account appeared to be $120,000 less than it was supposed to be. Four of the eight funds in the account were missing in both online and print statements.

Mr. Herbert, who is retired and lives in Tempe, Ariz., said he corresponded with customer-service representatives by phone and online for several weeks before the problem was resolved.

“I don’t want to leave Vanguard, but problems like these lead you to ask if this is going to continue to occur,” he said.

Earlier this week, a new technical problem surfaced at Vanguard that had not occurred before: some customers who made new investments received e-mails erroneously informing them that there were insufficient funds in their relevant settlement accounts.

Christian Vogler and his wife, who live outside of Washington, D.C., received the incorrect email Tuesday morning after buying shares in the Vanguard Real Estate Index Fund for a Roth IRA Monday afternoon.

The couple, who are in their 40s, have been Vanguard customers for about four years, and had faced one other technical issue, previously.

“Is this going to keep a behemoth like Vanguard from serving its clients as it should?” Mr. Herbert added.

Read more here.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com