Editors' Pick: Originally Published Thursday, Dec. 17.
These are heady times for the Vanguard Group, the financial behemoth that runs $3.4 trillion out of a tiny Pennsylvania borough just northwest of Philadelphia.
Barron's projected in an article last month that Vanguard would have a "monster year" in 2015, breaking the record for new money coming into a mutual fund complex. The company is taking $16 billion a year away from the rest of the financial industry in fees alone, according to a recent Bloomberg analysis.
Over the years, Vanguard has had no peer among financial companies when it comes to goodwill from customers and the media. It regularly dominates various "best" mutual fund lists put together by financial publications. Founder John C. Bogle is so celebrated for his focus on low costs and doing the right thing for the small investor that he's frequently referred to as "Saint Jack."
So why is a vocal collection of current and former employees putting so much energy into blasting the heralded operation?
Two whistleblowers who went public with grievances have been fired over the past two and a half years. One of them had complained about Vanguard's tax policies and the other had criticized its online customer security. On the employment Web site Glassdoor.com, hundreds of anonymous employees have expressed misgivings: As of Dec. 16, only 57% of 1,100 current and former workers posting comments said they'd recommend Vanguard to a friend.
And while the company has been a standout for its progressive LGBT policies, it otherwise has been a lightning rod for discrimination complaints. In the past five years, more than a dozen lawsuits have been filed by employees who allege gender, race, age, religious and disability discrimination, according to federal court records.
"If you don't drink the Kool-Aid at Vanguard, you're not long for that place," said Daniel P. Wiener, who has been writing about Vanguard for 25 years as editor of The Independent Adviser for Vanguard Investors. "There's a dogma there, and you just don't question the dogma."
Wiener and others say Vanguard is coasting on the outdated image of the company that Bogle built.
"This is not Jack Bogle's Vanguard, just people benefiting from it," wrote a former employee of 10 years in a post on Glassdoor.com last month.
It was designated a Fortune Magazine "Best Place to Work" six times between 2001 and 2007, but has not been on the list since.
Vanguard said it would not make an official available to comment for this story. When I subsequently sent a five-page list of questions, spokeswoman Arianna Stefanoni Sherlock said in an email that most of my questions were "highly speculative and/or based on suspect sources" and that the firm would not attempt to refute "inaccurate accusations."
Bogle, who was pushed off Vanguard's board in 1999 when he reached the mandatory retirement age of 70, said in a telephone interview that while he can't speak for current management, he believes the firm still has "a strong, honorable culture."
The company he launched in 1975 with 28 people has grown to more than 15,000, he noted. It is no surprise that more complaints would roll in as the company grew that big, he said.
Thanks to a unique structure that Bogle created, Vanguard since its inception has been the low-cost leader among mutual fund operations. At Vanguard, the people who invest in its funds are also its owners. That means it's not under pressure to generate profits for public investors, as Charles Schwab and T. Rowe Price do, or for private owners, as Fidelity does.
Over the years, that has left more money in customers' pockets and has generated tremendous goodwill for Vanguard. It also has been a rallying point for employees who were proud to work at a company perceived as being principled in an industry often beset by scandal.
But it has evolved into a different company in the view of Leigh Ann Harris, a certified financial planner who quit Vanguard in February and sued in July for religious discrimination. (A Federal magistrate judge in Charlotte, N.C., recently recommended her case be dismissed.)
"I think Bogle not being there has been the downfall of Vanguard," she said in a telephone interview.
Harris says the new money management product the firm launched in May, Vanguard Personal Advisor Services, is an example of how the company is changing.
In keeping with its "investors first" philosophy, Vanguard says on its Web site that advisers for the new product get no paid incentives "for selling you investment products and services."
But Harris says that financial planners who don't reach company-set quotas for signing up customers for Personal Advisor Services don't qualify for performance bonuses.
A financial planner at the firm who spoke on the condition that he not be identified confirmed that it "counts against you" when you don't recruit enough customers.
"We used to be client focused," he said. "Now the focus has become totally on cost and I don't feel like the client is getting the proper care anymore."
Although Vanguard already is famous for keeping expenses at a minimum, CEO F. William McNabb III says he is looking to cut costs more. He told Bloomberg in May that Vanguard is "not done on the cost side" and noted that the competition was "getting smarter" about cutting fees lest they lose business to Vanguard. That means McNabb needs to one-up the Vanguard copiers.
When an already frugal company like Vanguard looks to reduce costs, though, there are limited places to slash.
The Philadelphia Inquirer reported in the fall that Vanguard would no longer staff the telephones on Saturdays. The newspaper also reported that more than 2,000 U.S. employees would be reclassified to non-exempt hourly status, prompting fears in the ranks that total compensation would decline.
Vanguard told the Inquirer that it would continue to offer competitive packages.
Even customer perks are at risk. Earlier this month, Vanguard told clients via email that it was dropping programs that offered discounted or complimentary access to Turbo Tax.
Commenters on Glassdoor.com say another way that Vanguard is shaving costs is by replacing older workers with recent college graduates who, after a 15-month training program, can land management jobs.
Vanguard has denied it in court documents filed in discrimination cases, but employees say that the firm uses a "forced ranking" system in which a portion of employees is designated to get a bad rating.
"It's hard to argue it hasn't worked so far," said a former telephone representative who was fired this year after challenging some of the company's sales strategies. "But I don't believe they can sustain it forever" without compromising morale, and, potentially, customer satisfaction, he said.
The company's critics say that Vanguard's policy of "managing out" older workers and complainers allows it to promote a no-layoffs policy that is more public relations spin than reality.
In a deposition taken in a discrimination case brought by Rebecca Snow, a former information systems engineer in the Charlotte, N.C., office, Snow's former manager Wanda Kirschbaum testified that Vanguard management kept a "talent list" of potential stars and a "hit list" of older managers. "All of us were scared" that they might be next on the latter, said Kirschbaum.
Kirschbaum testified that her boss ordered her to write a negative performance review of Snow even though she was doing a "great job." The boss needed to add a person to the "needs improvement" list, said Kirschbaum, who said she refused to write the negative review.
In her lawsuit, Snow said the firm discriminated against her after she took a Family and Medical leave to take care of her dying mother.
Kirschbaum described a management that was blunt about discarding employees. When she attempted to send a woman in her late 50's for training to learn a new skill, she testified that her boss told her, "You're not allowed, we are working her out of the company."
On Sept. 25, a federal judge in Charlotte denied Vanguard's motion to dismiss the Snow case. Just weeks before a November trial date, the two sides settled and Snow took down a Web site that had been chronicling employees' lawsuits against the company.
That site previously had been kept by a former telephone representative who sued Vanguard in 2010 for age discrimination and settled with the firm in 2011. He said that Vanguard began to make "inaccurate" accusations about his work during the financial crisis and fired him in May 2009, when he was 52. Today, Harris runs a Web site that publishes the lawsuit material.
Vanguard runs the risk that employee lawsuits could tarnish its reputation or drain its coffers.
In June of 2013, it fired a tax lawyer, David Danon, who had filed a lawsuit the month before saying that Vanguard cheated on its taxes. An expert witness for Danon has said the company underpaid its taxes by $34.6 billion between 2007 and 2014. Although the case is unlikely to go to court, any settlement with teeth has potential to cost Vanguard's shareholders by raising management costs.
Vanguard has said that Danon violated legal ethics rules when he supplied documents to the Securities and Exchange Commission, the Internal Revenue Service and state tax authorities, and that the case is without merit.
Danon already has collected $117,000 for his help with audits of Vanguard's taxes by Texas, and the California Franchise Tax Board has sent his allegations to its criminal investigations arm, according to the Inquirer.
In New York, a State Supreme Court judge said in November that Danon could not collect a whistle-blower award because he violated state legal ethics rules by suing while he still worked there and had access to confidential information. The judge did not rule on the merits of case. The SEC and the IRS declined to comment.
The SEC, in the meantime, has also received internal documents about problems at Vanguard from Karen Brock, a client relationship administrator who Vanguard fired after she spoke to me on the record for an article in August. The SEC would not comment when I asked about Brock's allegations, which focused largely on the security of customers' online accounts.
In her deposition in the Snow case, Kirschbaum said she had been contacted by the Department of Labor, which was investigating Snow's allegations.
It could be problematic for Vanguard if employment regulators were to refocus on the firm. The Equal Employment Opportunity Commission already has settled two race discrimination cases with Vanguard, in 2008 and 2010. Sixteen subsequent discrimination suits including several with allegations of degrading treatment of African Americans could put the firm on the agency's radar again.
Unhappy employees have the potential to lead to unhappy customers, which would be a blow to Vanguard. Since 2012, it has commanded either second- or third-place in the annual study of Self-Directed Investor Satisfaction by J.D. Power and Associates. Recent anecdotal feedback on Twitter, though, suggests that at least some customers are noticing changes.
"What happened to Vanguard Group's Customer Service?" asked Twitter user Marty Weill on Nov. 21. "Once excellent, now a mess."
"After so many years of loving @Vanguard_Group, some recent experiences are causing me to question the quality there," wrote Certified Financial Planner Lauren Lyons Cole, a former contributor to MainStreet, TheStreet's sister site, on Dec. 2.
"@Vanguard_Group A Web login that doesn't work and I gave up after a two-hour hold on telephone support. Shame on you," wrote @davidalow44 on Dec. 14.
"@Vanguard_Group I am absolutely disgusted at your lack of customer service," said @heynoto on Dec. 14.
Kim Cameron, associate dean of executive education at the University of Michigan's Ross School of Business, says companies like Vanguard that have built a strong brand "have got it made for a while."
But that can only help so much if a firm goes to extremes at cutting expenses, because a stressed out workforce can take its toll in high turnover and exorbitant health care costs, Cameron said. To him, Vanguard sounds like the classic case of "a company whose culture is going to run out of steam."