Vanguard, American Express’ INVEST deal hits a wall — of hard numbers — and shatters its perceived value amid blatant disclosure of the “fine print” — it’s a huge conflict of interest for Amex

The semi-confusing, pricier AmEx Vanguard package is cheaper, clearer, and better unbundled, calculates an RIA, but may not be too fancy for one-stop convenience, a Morningstar analyst counters

Brooke’s Note: As journalists, we can get just as tired of digging through ambiguous fee information as the investor. It causes too much depression, boredom, and brain damage to try to sort it all out. So when we learned that Jeffrey DeMaso had worked through the confusing fees, services (including the value of a card member “point” to a Vanguard user via Amex]and disclosures in the Amex-Vanguard deal, it really expanded our understanding of the story. When we let Ron Rhoades look over it, he didn’t mince his words either. Not only do the PR departments at Vanguard and Amex disagree with these views, but one Morningstar researcher has argued that we all get a little too stirred up over a few Cent, you decide whether it’s a mountain made out of a mosquito – or a mountain made out of a volcano.

American Express and Vanguard Group’s new private-labeling deal literally doesn’t pay off when its confusing fees and service levels are sorted out, according to a newsletter that describes itself as the “supreme authority” on Vanguard funds.

The Malvern, Pa., an employee-owned discount manager, and the often high-priced New York financial firm announced earlier this month the joint service offering Vanguard’s financial planning to the Amex legion of credit cardholders.

Ron Rhoades: “We want to convey transparency, openness and clarity.”

The trick: A hefty fee of 50 basis points and a tightrope walk, a hair-raising conflict of interest.

Amex receives an initial “promoter fee” of up to 50% of the fee cardholders pay to Vanguard Advisers, Inc. (VAI) to register with INVEST.

But deep in the fine print is this warning: “Amex’s receipt of this compensation creates a conflict of interest because Amex has a financial incentive to sponsor VAI’s consulting services.”

Amex is used to taking on bureaucracies on representation issues. Just two days after the Vanguard deal was announced, he was the subject of a lengthy Wall Street Journal article headlined: IRS investigates American Express sales pitches

Ron Rhoades, an assistant professor of finance at the Gordon Ford School of Business at Western Kentucky University, says Vanguard has a fiduciary responsibility to make fees consistent and known.

“I appreciate Vanguard very much. I appreciate them less after this candy,” he says.

Karyn Baldwin, spokeswoman for Vanguard, says INVEST materials comply with Securities and Exchange Commission (SEC) guidelines and marketing rules.

“Fee and service details, as well as the relationship between Vanguard and American Express, will be prominently disclosed in these materials,” she says.

No net benefit

Formally known as “INVEST for Amex by Vanguard,” the investment management and credit card services program has a sweetener — Amex “hints” at what it calls “exclusive rewards” for those who sign up.

But INVEST is far from a bargain, even with points thrown in, says Jeff DeMaso, research editor of the Independent Adviser for Vanguard Investors.

“Is there a net benefit to the credit card holders who would be without a planner without this deal? Not really,” says DeMaso.

Any investor can get the same advice from Vanguard Personal Advisor Services (PAS). The company offers a digital robo advisor for 20 basis points or a living, breathing advisor for 30 basis points the company website. Minimum investments apply.

INVEST investors would pay the same 20 basis points for Vanguard’s digital service, he notes. See: Vanguard Group signals launch of long-awaited — vanilla as hell — dirt cheap, maybe “chunky” robo-advisor, but Schwab, Fidelity should still be concerned, analysts say

That looks like private branding from Vanguard PAS to me,” says DeMaso. See: With McKinsey helping to increase its “efficiency,” the Vanguard Group strikes a eye-popping customer acquisition deal with American Express, which puts a large fee on the financial plan that the two companies roughly split

Outstanding service

Amex spokeswoman Elizabeth Crosta says it’s up to card customers to decide if “INVEST is right for them based on their own needs and financial goals.”

Baldwin initially did not want to answer specific questions, but referred RABiz to a statement. [She later responded to a series of follow-ups]

“INVEST is a new and standalone service, available exclusively to American Express cardholders, that combines Vanguard’s advice and investment management with cardmember rewards,” the statement said.

“In order to enroll in INVEST, cardholders must open (or already have) a Vanguard brokerage account.”

However, according to the fine print on the INVEST website, Amex customers must jump through a number of other hurdles before they are eligible to use Vanguard’s services.

Another disclosure notes that the “same investment advisory and financial planning services” are available for a “lower fee” by investing directly in Vanguard’s advisory services — without the added benefits of Amex premiums and exclusive advisory services and planning tools provided by VAI are offered .

However, the level of services offered to investors depends on the amount of assets in their portfolio.

captive market

INVEST imposes minimum accounts starting at $10,000 in “eligible investments.” This caveat means that the money must be invested exclusively in Vanguard funds.

Karen Baldwin
Karyn Baldwin: “The service is further complemented by the unique benefits for cardholders.”

“Prohibited investments include non-Vanguard mutual funds, individual bonds, securities traded on international exchanges, preferred stocks, penny stocks, illiquid stocks and options,” the website reads.

Cardholders are eligible for an exclusive array of rewards, and if they have an American Express High Yield Savings account, they’re also eligible to earn a $45 annual cash bonus, according to the site.

“The only people who would get advice signing up for INVEST for Amex by Vanguard that wouldn’t get it if they opted for Vanguard PAS are Amex cardholders who have $10,000 to $50,000 can invest. But in this case you only get a 30 minute consultation… How valuable or productive is a 30 minute consultation?

“And if you have between $50,000 and $100,000, you may be paying more but getting less,” says DeMaso.

To receive an unlimited number of consultations, an investor must have an end-of-day account balance of at least $100,000 at least once during a 30-day period and be receiving at least $80,000 of consultations at any time.

“Contrast that to Vanguard PAS, where you also get ongoing access to a consultant whenever you need it… and the minimum is $50,000,” says DeMaso.

It’s possible that the 50 basis point fee will be reduced depending on “asset allocation, account type and specific holdings,” but under no circumstances will it be less than 45 basis points, the fine print states.

“All costs associated with fund expense ratios will continue to accrue at all times. Other fees may apply based on a “Brokerage Account Commissions and Fees Table”.

The much-vaunted Amex points are counted annually and can range from 5,000 points on taxable assets from $50,000 to $100,000; 25,000 points for more than $100,000 to $500,000 and 50,000 points if taxable assets are more than $500,000. Balances on classic or Roth individual pension accounts are excluded.

fee dissection

The hard numbers make it clear that the difference in fees is significant, DeMaseo writes in his analysis.

Alec Lucas, Morning Star
Alec Lucas: “This is another example of the industry using Vanguard to criticize Vanguard.”

For example, an investor with $100,000 could go straight to Vanguard and sign up for PAS and pay 30 basis points — or $300 per year.

Or the same investor signs up with INVEST and pays 50 basis points or $500 per year.

“Do the ‘extra bonuses’ make up the $200 cost difference? no 5,000 points equals $50 assuming a 1% conversion rate.

“Add the full $75 cash bonus for $50,000 that you also have stashed away in your high-yield Amex savings account,” DeMaso says in his report.

“So ‘INVEST for Amex by Vanguard’ costs $500 per year, but you earn $125 in rewards, bringing your ‘reward-adjusted cost’ to $375. That’s still more than the $300 you’d pay if you went direct to Vanguard. “

Alec Lucas, a strategist at Morningstar Research Services, says all of this fee analysis may be going too far.

“This is another example of the industry using Vanguard to criticize Vanguard,” he says.

“If you think Vanguard’s 50 basis point fee at Amex is a bad deal, you should also look to Fidelity for advice and workforce planning improvement. But with Amex, you also get awards.”

The simplicity of bundling services under one account can lend their own value, Lucas says.

“If choosing Vanguard wasn’t a better deal, Amex wouldn’t be compensated for the deal,” he explains.

“At the same time, you have the rewards and rewarding savings that you don’t get with Vanguard, but you also have the ease of using the credit card.”

Baldwin agrees. “INVEST not only offers clients an intuitive digital experience, ongoing portfolio management, financial planning tools and the guidance of a human advisor, the service is further complemented by unique card member benefits – including membership rewards and high return savings on account bonuses.”

brand risk

It’s positive to give people who don’t have it planning in a form that energizes them, says Baldwin.

“It is worth noting that consulting is not a one-size-fits-all value proposition; it should be available in a range of options to best suit investor needs and preferences and desired value for money.”

Rhoades says Vanguard’s explanations for the differences in fees and service aren’t entirely satisfactory.

The fact that two groups of Vanguard brokerage customers end up paying two rates carries risks, he says.

“Does Vanguard realize that paying some clients for the same consulting services (even if those clients receive additional benefits from Amex) is likely to be a blow to Vanguard’s low-cost reputation and may also detract from Vanguard’s corporate culture?”

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