IU.eu: What opportunities do you feel, then, that the UK investment advisory market offers to you?

Rampulla: It’s certainly a very different business model to that in the US. Before moving to London, I spent six years helping establish our advisory business in the US. One of the reasons why Vanguard was very successful there is that there are a lot of fee-based investment advisors. In the UK, we estimate that the proportion of fee-based advisors is 10% or so, representing around 10-15% of assets. We’re hoping to help grow that segment of the market, and we want to help to educate people about the benefits of fee-based advice. Whether the UK regulator’s Retail Distribution Review helps drive the market towards fee-based advisory work or not, we still feel that there are a lot of inefficiencies in the market for retail investment products. There are layers of extra costs, many of which are not transparent. This is obviously not in the best interests of the investor, and we’re hoping to highlight that.

I find that, when I have conversations with some investors here, they still don’t really think about the impact and importance of fund costs. In the US market, this message is more broadly known, so we have to focus on that here as well.

IU.eu: On the subject of costs, the index funds you are launching are cheaper in terms of annual charge, or total expense ratio, than competing investment products, such as ETFs, where they exist. But what about the overall cost to an investor of buying your index funds via a “platform”, since most people won’t have the £100,000 necessary to deal directly with you? The platforms charge their own fees, and the investor will also have to pay his IFA (independent financial advisor) for advice.

Rampulla: Our funds are available via such IFA platforms, but we’re also in discussions with providers of other retail distribution routes. For example, Alliance Trust Savings is going to offer online trades in our funds for £12.50 per transaction. Broadly speaking, though, while there will undoubtedly be some extra costs for most investors when buying a Vanguard fund, we think that, all things being equal, we are going to give people a much better deal, since our expenses are so much lower. Over time, we’d love to see all the costs of investing come down, and we’ll do what we can to help influence that.

I don’t want to suggest, though, that it’s not worth paying for a good fee-based advisor. They earn their compensation if they’re doing their job well, helping with financial planning and, for example, saving investors from themselves if they want to sell at the wrong time. We think that’s money well spent, but the fees need to be fairly disclosed, and often that isn’t the case as things stand.

IU.eu: Do you undertake securities lending within your index funds and, if so, how are revenues split between Vanguard and fund investors?

Rampulla: That’s a very topical question. From day one we won’t be lending securities, but we plan to do it in future, under Vanguard’s general securities lending philosophy, which has been called boring by some, but which has served us well for a long time. We insist on highly-collateralised lending, using cash or government bonds, and we only reinvest collateral overnight, so we don’t take duration risk. All the revenues from the lending operations, net of the costs of running them, go back to shareholders, so we’re not in a position of taking risks with someone else’s money and keeping a good chunk of the profits for ourselves.

IU.eu: What are your future product launch plans?

Rampulla: If you look at what we currently have in place, a UK investor can already build a diversified global portfolio. Advisors do like to slice the market up in different ways, though, whether by size or style, so we’ll look to add some funds there, and also in some additional foreign markets, and areas of the fixed income markets. We’ll also add some low-cost actively-managed funds. And, as I’ve mentioned, we’re interested in a European ETF range, though there’s no date set yet for their launch.

IU.eu: What have been your overall impressions since moving to Europe with Vanguard?

Rampulla: I’m pleasantly surprised at the reaction of people within our target market to our arrival, and more people seemed to know Vanguard over here than I had expected. But there are still big differences in the way the investment advisory markets work here and across the Atlantic, as I’ve mentioned. The average member of the general public in the US is much more used to the idea of running his or her investment portfolio, since 401k, defined contribution pension plans have been around for so long. There are many US publications devoted to helping people invest their retirement assets in this way. Here, by contrast, self-directed investing is a relatively much smaller part of the market, though it feels as though things may be beginning to head in the same direction as in the US. It’s a big challenge, but a very exciting time to be here.

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