Observers of the wealth management industry have no shortage of advice for Vanguard about how to proceed after its year-end tech problems, or predictions about the effects on the company and how regulators may react.
In short: It’s time to spend, not skimp on technology; crack down on your vendors; and your clients may have short memories, but the government does not.
Problems with Vanguard’s website started as early as Dec. 23 and continued for several days, leaving customers without account statements, transaction confirmations, and tax and other year-end forms. The firm blamed a “third-party service provider.”
“Vanguard is notoriously cheap when it comes to spending money on technology,” said Doug Fritz, founder and CEO of F2 Strategy near San Francisco. “You don’t become the low-cost provider by spending on innovation and non-critical infrastructure. They’ve made moves to improve that, but at this point being thrifty is in their culture, and it will take a decade to shift that mindset.”
That mindset is clearly still in force as CEO Tim Buckley recently was quoted as saying that Vanguard would cut $1 billion from its investment fund fees by 2025 after reducing its charges by $140 million last year. Vanguard did not respond to emails requesting confirmation of that figure or confirmation that it spends $1 billion yearly on technology.
“They’re talking a lot about cutting another billion in costs out of the system, but I remind people that cutting a billion out of the system is only the equivalent of 1.25 basis points, 0.0125% (with AUM of $8 trillion),” said Dan Wiener, chairman of Adviser Investments in Brooklyn and co-editor of The Independent Adviser for Vanguard Investors, a monthly newsletter about Vanguard. “Wouldn’t that billion dollars be better spent on technology and spent well?”
Fritz, though, calls $1 billion “a lot of money for anybody, a huge number,” regardless of the percentage of AUM it represents.
Vanguard issued the following number-free statement.
“Vanguard has accelerated efforts and increased investments to improve our technology and deliver an even better experience for our retail clients, plan sponsors and participants, and financial advisors. We’re actively exploring and implementing new technologies, resources and capabilities to drive innovation, improve stability and resiliency, build efficiencies and lower operation costs across our firm.”
Vanguard’s vendors should be the target of some of those investments and technologies since “you are only as strong as your weakest link,” said Tim Welsh, president of Nexus Strategy in Larkspur, California. “So look for them to take drastic measures with their vendors to make sure it doesn’t happen again.” said
Reports say a hack at R. R. Donnelley & Sons may have caused the Vanguard outage and was behind recent service outages at Fidelity. In an SEC filing on Jan. 13, Donnelley said it had disclosed on Dec. 27 “a systems intrusion in its technical environment.” It said it was working with law enforcement and cybersecurity experts to beef up security and was “not aware of any compromise of client data.”
Technical issues at major asset managers are nothing new. In November 2020, service problems hit Fidelity, Ameritrade, Vanguard, Merrill Lynch and Charles Schwab on the same day.
Mitch Avnet, CEO and managing partner of Compliance Risk Concepts in New York City, said firms have to do a better job of staying ahead of the hackers.
“As technology becomes more sophisticated, so do the attempts to take advantage of or circumvent it,” he said. “A fully loaded cybersecurity program is a constantly evolving task with lots of active course correction. Firms’ biggest issues will be staying ahead of threats by constantly evaluating their programs compared to current and future risks to firm and client assets and data.”
With regard to Vanguard, Wiener said the firm is “notable for telling you something only affected a small number of people. But when you have millions and millions of customers, what is small? Security is always an issue, and you need to have redundancy if one of your service providers gives out,” referring to the year-end confirmations being requested at the end of December which Vanguard was unable to produce.
All the negative press that generated, said Avnet, can be a “smoke signal for regulators.”
SEC Chairman Gary Gensler said this week that he wants to use his agency’s regulatory powers to force companies to disclose risks to their businesses from cyber attacks and to report such attacks to investors.
He also suggested that the SEC could regulate public companies’ third-party service providers, including investor reporting systems.
Will greater regulatory oversight satisfy clients?
Avnet said Vanguard can expect to lose some relationships.
“Clients expect an advisor or broker to be able to deliver services as agreed upon,” he said. “If supportive tech is hindering rather than helping, you can be sure that investors of all levels of sophistication will be frustrated enough to find a better solution.”
Craig Iskowitz of Ezra Group in East Brunswick, New Jersey, disagreed. “The odds are that the long-term fallout will be minimal,” he said, “mostly because it is only affecting a small and vocal group out of their 30 million customers.”
Welsh seconded that. “Clients trust Vanguard for its approach to low-cost investing, so having a dysfunctional website will definitely eat away at some of that trust,” he said, “But it will be short-term in nature, however, as they’ll get it fixed, they’ll weather the storm and ultimately, most clients will forget it happened a couple of months from now.”
