Morningstar Advisor - August/September 2011 - (Page 49)

If we see investors using any of our funds or ETFs in a potentially harmful way—everything [at Vanguard] is nautical, so we like to say that we make them ‘walk the plank.’ Seriously, we will cut off relationships where we see a conflict with our core values. Bill McNabb CEO, Vanguard just so important. And we’ve seen so many times people that aren’t working with a good financial advisor, that don’t have a disciplined investment plan in place, they just naturally do the wrong thing. That’s human nature. As Bill was referring to the crisis period, there are probably many individuals who were not disciplined. Exactly at the wrong time—by February of 2009—they said, “I can’t take it anymore,” and they probably went all to cash. That’s really the value of advice and being very thoughtful and understanding for investors. Culloton: Bill, is there a tension or conflict between serving advisors and serving direct investors in terms of how you approach those markets? How do you see investors and advisors behaving with your funds? McNabb: It’s a question we get asked frequently. I was meeting with the team that serves advisors this morning, and that was the first question from the audience. I don’t actually think it’s a conflict at all. There is a proportion of the population who really wants to do it themselves. They want to go to the Morningstars of the world and learn as much as they can. They need really good tools, so we provide those tools on the web, assistance from our phone associates, and some basic advice programs. before us. And the best I can cobble together from the industry data, backing out 401(k) plans and just looking at retail investors, it’s always been about that percentage. It’s a very important constituency to us, and we want to serve those folks incredibly well. The other side of the equation is where people are looking for a professional to walk them through the process and actually manage the process for them. We want to give advisors the same support that we’re providing to our other client segments, so that they can achieve their goals more effectively. Our investment philosophy is not any different. Our service mentality is not any different. We don’t feel conflicted, largely as a result of the transparency brought about by the change in the market structure and compensation. There would have been a conflict for us, to speak bluntly, if we were part of the old commission-based structure. I do not believe that we could ever run no-load funds on one side and load funds on the other. Philosophically, such a model would have been just totally anathema to us, and not something we would ever contemplate. But the way the market has evolved, we’ve chosen to try to serve this constituency the same way we serve plan sponsors, endowments, foundations, and so forth. We just keep trying to bring that mentality to it. Culloton: Both of your firms offer ETFs and traditional mutual funds. What do you see advisors buying most from you, ETFs or traditional funds? McNabb: This year, ETFs are running ahead of traditional mutual funds for our advisor business. In 2009, funds were actually stronger. Last year and year-to-date 2011, ETFs have been a bigger part of the flow. Flanagan: For all of our clients, our fundamental focus is understanding what their investment need is, and then whether we have investment capability to meet that need. We look at the vehicle as a delivery mechanism. So, I really don’t get focused on whether it’s an ETF, a mutual fund, or any of the different vehicles. Our goal is to meet the investment objective of our clients. That said, we’ve seen the same thing Bill has said. I personally have not declared a vehicle as a winner in the long-run. Mutual funds and ETFs both have a very, very important place in the world. Culloton: I’ve heard Gus Sauter say he views ETFs and mutual funds as just different distribution vehicles for really the same thing. McNabb: That was the exact quote I was going However, the self-directed segment has been about 25% of the investing public, I think, for going on 35 years. Vanguard went no-load in 1977. There were several no-load companies to throw out. In our case, it’s really true because of the share-class nature of our ETFs. And I’m sure it’s not lost on you guys that for the Admiral Shares of our index funds, which are for retail investors with $10,000 or more to invest, the expense ratios are identical to those of the ETF shares in most cases. We believe very strongly that clients, whether it’s through the advisor channel or directly, MorningstarAdvisor.com 49 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2011

Morningstar Advisor - August/September 2011
Contents
Contributors
Letter From the Editor
Simplicity and Design Matter
Do You Use ETFs Strategically or Tactically?
The Institutional Way
How to Analyze an ETF
Eyeing ETFs’ Next Chapter
Small-Cap/Large-Cap Flip-Flop?
Four Picks for the Present
Investment Briefs
Morningstar Investment Conference
Pitfalls of Peer Groups
A REIT Recovery, With a Catch
Turning Fund Distribution on Its Head
Here Come ETF Managed Portfolios
Circle These Picks Amid the Crop of New ETFs
ETF Analyst Favorites
Beware, the Accidental Portfolio Manager
It’s the Destination, Not the Vehicle
New Growth, Rooted in Experience
Better Ways to Look at ETFs
How to Better Manage Your Clients’ Future(s)
More Bargain Than Bubble
Cheap, Local, and On a Roll
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
First-Quarter Assets Hit an All-Time High
You Say You Want a Revolution?

Morningstar Advisor - August/September 2011