is vanguard a fiduciary

Is Vanguard a Fiduciary?

Vanguard is one of the most well-known financial management firms that also provide investment advice. In light of this, I wondered whether Vanguard is actually a fiduciary with all the responsibilities it entails toward their clients.

Vanguard financial advisors are fiduciaries as defined under Section 408(g)(11) of ERISA and Section 4975(f)(8)(J) of the Internal Revenue Code. Vanguard must act prudently and only with the clients’ interests in mind when providing investment advice.

This whole topic is a bit complicated to let’s break it down into sections. We’ll look at what Vanguard personal advisor services actually is, what the difference between a fiduciary and a financial advisor is and how you can go about finding out whether an advisor is a fiduciary.

What is the difference between a fiduciary and a financial advisor?

The biggest difference between financial and fiduciary advisors is the ethical standard they are held to when advising clients. While financial advisors have to propose investments that are suitable for a specific client a fiduciary advisor is legally required to put their client’s interest above their company’s.

In addition, there are several other formal factors that distinguish financial from fiduciary advisors as we can see from the table below:

Financial AdvisorFiduciary Advisor
RegistrationNone, Certified Financial Planner (CFP), FINRA Series 7 license SEC or state securities regulators, trade associations
CommissionYesNo
Series 7 licenseYesNo
Series 63 or 66 licenseYesNo
Financial Advisor vs. Fiduciary Advisor
  • Registration: Fiduciary advisors typically have to be regulated through the SEC or state security regulators. In some cases, trade associations may also act as the regulatory body for fiduciary advisors. Financial advisors on the other hand may not be registered by security authorities. They typically are Certified Financial Planners (CFP) or hold a FINRA Series 7 Licence.
  • Commission: Financial advisors usually work on commission, fiduciary advisors do not. This means that financial advisors may get paid for referring their clients to a certain investment product or receive a cut of each investment. By law, fiduciary advisors cannot receive commissions for referrals – to keep their client’s best interest in mind.
  • License: Fiduciary advisors don’t necessarily hold an additional license since they are already registered with federal or state authorities. Financial advisors typically hold a Seris 7 and/or Series 63 or 66 license which allows them to advise clients on financial matters.

In summary, fiduciary advisors are not allowed to recommend investments that might be suitable to your situation but not ideal. A financial advisor may propose investments that could be considered suitable but also earns him a commission.

What is the fiduciary rule?

The fiduciary rule was initiated by the Department of Labor under the Obama administration and would have – if enacted – required all financial and retirement advisors to act as fiduciaries. However, this rule was practically nullified in 2018 when it was put on hold and eventually dropped by the Trump administration.

Handshake, Hands, Laptop, Monitor, Online, Digital
Fidcuaries have to put their clients’ interest first

As a result, the situation remains the same as before: it is essentially up to financial advisors whether they pledge to act as fiduciary advisors.

Does Vanguard act as a fiduciary?

Vanguard pledges to act as a fiduciary advisor as defined under Section 408(g)(11) of ERISA and Section 4975(f)(8)(J) of the Internal Revenue Code.

The way to verify for yourself whether Vanguard – or any other advisor – is a fiduciary is to check their registration with the SEC and look for a document called “ADV Part 2”. Within this document it should unequivocally state that the party in question will act as a fiduciary.

So, that’s exactly what I did for Vanguard! The first thing to check is whether Vanguard is registered with the SEC in the Investment Adviser Public Disclosure sections of their website.

SEC - Vanguard advisors registration

Once we have successfully navigated to the SEC’s (surprisingly) slick site we can look for Vanguard’s advisor services in the search results:

SEC search results

And indeed we see that Vanguard has multiple companies registered with the SEC. Vanguard Capital and Vanguard Equities are no longer registered but Vanguard Advisors, Inc is still active. The blue icon below tells us that Vanguard is an investment advisory firm registered with the SEC.

When clicking on “MORE DETAILS”, we will find a lot more information about Vanguard’s registration and fiduciary status. The main document we are looking fr here is the ADV Part 2. If Vanguard is a fiduciary advisor we should find the document linked here.

SEC Vanguard Registration Documents

We now see that Vanguard’s registration with the SEC has been approved on 7/28/1995 and also the option to view the latest ADV forms filed along with the Part 2 Brochures. This is the document we need!

After scanning the ADV briefly you’ll find the following clause:

Are Vanguard Financial Advisors Fiduciaries?

VAI (Vanguard Advisors, Inc) will act as a fiduciary advisor as defined under Section 408(g)(11) of ERISA and Section 4975(f)(8)(J) of the Code – which is the Internal Revenue Code.

According to these sources of law the term “fiduciary” means any person who:

  • exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets,
  • renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or
  • has any discretionary authority or discretionary responsibility in the administration of such plan.

Are Vanguard Personal Advisor services fiduciaries?

Since Vanguard personal advisor services act as fiduciary advisors they are legally required to put your interest as a client first. However, keep in mind that this obligation will only extend to investments they are actually qualified to advise on, namely: Vanguard products.

Essentially, Vanguard personal advisor services is an option to have your portfolio managed by a Vanguard advisor. You can partner with an advisor for a low annual fee and they will put together a portfolio based on your investment goals.

This is what their current fee structure looks like:

FEEMANAGED ASSETS
0.30%On assets up to $5 million
0.20%On assets above $5 million and up to $10 million
0.10%On assets above $10 million and up to $25 million
0.05%On assets above $25 million

(With their extremely low fees one often wonders: how does Vanguard make money?)

You might find it difficult to discuss other investment options or tax and legal questions with your personal Vanguard advisor. Generally, fiduciary advisors will be careful not to over-extend their area of expertise when giving advice as they can be held legally accountable for their recommendations.

Does Vanguard have good financial advisors?

Now that we have seen that Vanguard advisors act as fiduciary advisors I have a little more trust that they won’t sell me some suitable fund which mostly pays them a high commission. Nonetheless, simply being a fiduciary advisor does not mean that the advice is really good for you.

Vanguard’s financial advisors are surely good in their own field: being knowledgeable about their own investment options, navigating you through all the fund options, and helping to clarify your retirement goals. But even fiduciary advisors have their limitations.

Conclusion

I always recommend doing your own research and educating yourself about finances. Nobody – but yourself – will take as much care of your assets as you. Even though fiduciary advisors are legally required to put your interest first, they are still human, they still make mistakes.

In general – when taking advice from someone – I always look at the person’s own achievements and values. Do they reflect what I want for me? Do they align with my beliefs?

So, if your goal is to become financially free and independent and retire early, ask yourself: has your “fiduciary advisor” achieved this? Or is he at least on his way to achieving the goals you are striving for?

If the answer is no, I’d run.


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