Vanguard Advisers, Inc.: Interactive advice tools
100 Vanguard Boulevard, Malvern, PA 19355
Effective as of March 31, 2014
This brochure provides information about the qualifications and business practices of the interactive advice tools offered through Vanguard Advisers, Inc. ("VAI"). If you have any questions about the contents, please contact us at 610-669-1000. The information in this brochure has not been approved or verified by the U.S. Securities and Exchange Commission ("SEC") or by any state securities authority.
Additional information about VAI also is available on the SEC's website at adviserinfo.sec.gov.
VAI is a registered investment advisor with the SEC. Registration does not imply a certain level of skill or training.
There have been no material changes in VAI's advisory business, fees and compensation, disciplinary information, or other practices related to these services.
Vanguard Advisers, Inc. ("VAI"), is a Pennsylvania corporation that provides investment advisory services to a wide variety of clients. VAI was incorporated in and has been in business since 1995. VAI is 100% owned by Goliath, Inc., a Delaware corporation. As such, VAI is an indirect, wholly owned subsidiary of The Vanguard Group, Inc. ("Vanguard"), the sponsor and manager of the Vanguard family of mutual funds, comprising The Vanguard Group of Investment Companies (the "Vanguard Funds"), which VAI typically recommends as investments.
VAI provides investment advisory services through various interactive advice products and tools.
VAI has developed certain educational questionnaires designed for investors in state-sponsored 529 plans that may invest in Vanguard Funds. Users can refer to a brochure to obtain asset allocation suggestions, which are based on the user's answers to a questionnaire designed to gauge their risk tolerance, investment experience, and time horizon.
The brochure suggests asset allocation models of stocks, bonds, and short-term reserves, along with, in some cases, portfolios of Vanguard Funds or non-Vanguard funds available through the users' state-sponsored 529 plan that can be used to implement the suggested allocations. The brochure does not provide comprehensive investment advice. The asset allocation suggestions may be limited to certain asset classes and may not be appropriate for other assets held by the investor.
Online advisory tools
Vanguard's website offers the following advisory tools:
Vanguard mutual fund and exchange-traded fund recommendation tools
The Vanguard mutual fund or exchange-traded fund ("ETF") recommendation tool recommends an allocation based on the user's responses to a questionnaire and the amount being invested. The mutual fund tool will recommend an asset allocation and a portfolio of up to four broad-market stock and bond index funds (Vanguard Total Stock Market Index Fund, Vanguard Total Bond Market Index Fund, Vanguard Total International Bond Index Fund, and Vanguard Total International Stock Index Fund), a Vanguard LifeStrategy® Fund, or Vanguard Prime Money Market Fund. The ETF recommendation tool will recommend an asset allocation and a portfolio of up to four broad-market stock and bond index ETFs (Vanguard Total Stock Market ETF, Vanguard Total Bond Market ETF, Vanguard Total International Bond Market ETF, and Vanguard FTSE All-World ex-US ETF) or Vanguard Prime Money Market Fund.
Personal Online Advisor
VAI offers Personal Online Advisor ("POA") to clients who want access to online investment advice. In order to provide investment recommendations through POA, VAI relies exclusively on the proprietary software, systems, and methodology developed and maintained by Financial Engines Advisors LLC ("Financial Engines"), an independent investment advisor unaffiliated with VAI.
Financial goal forecasting. POA generates a forecast, or estimate, of the client's chance of reaching his or her financial goals. Forecasts are based on information in our systems including:
The forecasts generated by POA are reasonable estimates based on information supplied by clients and are not guarantees of future results. Reliance on historical and current data necessarily involves certain inherent limitations.
POA does not recommend allocations of individual stocks, even if they are available for investment in a client's account. POA does not select the investment alternatives available for investment in a participant's account. By recommending allocations among the available investments, POA does not endorse the selection of particular investments as available investments for a participant's account.
POA will not take into consideration any favorable tax treatment on a participant's company stock investment when providing advice.
VAI only offers nondiscretionary investment advice through POA. Clients have no obligation to accept any suggestions provided by POA and neither VAI, Vanguard, nor Financial Engines is authorized to make decisions regarding clients' accounts or investments. Since VAI does not provide ongoing discretionary or nondiscretionary account management services through the POA service, it does not track its assets under management.
The interactive advice tools do not provide ongoing discretionary or nondiscretionary account management services and therefore do not track assets under management.
There is no charge to use the online advisory questionnaires or interactive advisory tools on Vanguard's public website. In addition, Vanguard clients do not pay a fee to use POA.
The advice provided by VAI will include recommendations to sell, hold, or purchase Vanguard Funds and ETFs. The purchase or sale of Vanguard Funds and ETFs through Vanguard (whether or not suggested by the interactive advice tools) is not subject to a load, sales charge, or commission. However, each Vanguard Fund incurs advisory, administrative, and custodial fees, as well as other fees and expenses that it pays out of its own assets. The advisory, administrative, custodial, and other costs make up the funds' expense ratios. Also, some Vanguard Funds impose purchase and redemption fees. Clients that are invested in Vanguard investments are subject to the applicable expense ratios and any purchase and redemption fees. Thus, acting in accordance with VAI's advice to purchase Vanguard Funds will result in the payment of fees to the Vanguard Funds and ETFs, in addition to any advisory fees assessed by VAI. Please consult the funds' prospectuses for information about a specific fund's expense ratio.
Participants in employer-sponsored retirement plans for which Vanguard provides recordkeeping services often are permitted to invest in non-Vanguard mutual funds. Because the advice provided by VAI may include recommendations to hold or purchase non-Vanguard mutual funds, acting in accordance with such advice may result in payments to Vanguard as compensation for participant-level recordkeeping and administrative services provided by Vanguard for such funds. This payment may be made by the fund company sponsoring the non-Vanguard mutual fund, by the plan sponsor, or by the participant investing in the non-Vanguard mutual fund.
The purchase or sale of third-party fund shares through Vanguard may be subject to a load or sales charge, although VAI generally recommends the purchase of no-load mutual funds. Additionally, participant account assets that are invested in third-party mutual funds indirectly bear the annual fund operating expenses charged by those mutual funds. A fund's expenses are detailed in the fund's prospectus. If POA recommends the purchase or sale of non-Vanguard investments, clients may incur additional fees, including transaction fees, brokerage charges, loads, sales charges, expense ratios, commissions, markups, or other fees or expenses. In addition, Vanguard or its affiliates may receive other compensation, including asset-based sales charges, service fees, revenue-sharing payments, 12b-1 fees, or other fees, in connection with such investments. VAI does not take into consideration whether Vanguard or any of its affiliates would receive fees from its recommendation to purchase, hold, or sell non-Vanguard investments.
VAI does not receive performance-based fees for use of the advisory questionnaires or interactive advisory tools by clients.
The advisory questionnaires are offered to investors in state-sponsored 529 plans that may use Vanguard Funds. The interactive advice tools are available to all vanguard.com users. VAI offers POA to clients, including retirement plan participants, who want access to online investment advice. POA is made available to retirement plan participants in plans approved by the plan sponsor. POA is available as a complimentary service to investors with $50,000 or more in assets at Vanguard.
VAI generally recommends investments in mutual funds and investment company securities. Although VAI will recommend investment strategies designed to be prudent and diversified, please remember that all investments, including mutual funds and investment company securities, involve some risk, including possible loss of principal. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss in a declining market. There is no assurance that you will achieve positive investment results by using VAI services. VAI cannot guarantee the future performance of your investments. Please consult the funds' prospectuses for more information about fund-specific risks.
POA offers investment advice based on an investment methodology developed by Financial Engines. POA uses Financial Engines' proprietary software to analyze historical and current returns, volatility, cross-correlations, and other factors to develop individualized target allocation recommendations. The Financial Engines software employs returns-based style analysis and optimization, among other techniques, to develop its target allocation recommendations. The main sources of information analyzed include historical returns for mutual funds, individual securities, and broad asset categories (e.g., large-capitalization U.S. equity returns, money market returns, foreign equity returns, etc.), security-specific information (such as mutual fund expense ratios), and current market data and information.
POA generates a forecast through the use of simulations, which are hypothetical economic scenarios based on analysis of historical and current returns, volatility, cross-correlations, and other factors. POA creates thousands of hypothetical future economic scenarios to evaluate how account investments might perform under a variety of circumstances, including changing interest rates, inflation, and market conditions. The forecast is a percentage figure representing the number of scenarios in which the clients' accounts would be sufficient to meet or exceed their investment goals at the end of the time horizon. POA also can include information about stock options in a financial goal forecast.
For more detailed information on Financial Engines and its investment methodology, please go to financialengines.com for a copy of its brochure.
VAI has no disciplinary information to disclose.
There are no individual investment advisors providing advice directly to clients. All output provided to users of the tools is based on user input and systematic models and allocations.
The Vanguard Group, Inc.
VAI is 100% owned by Goliath Inc., a Delaware corporation, which is wholly owned by Vanguard. Vanguard, also a registered investment adviser, provides a range of investment advisory and administrative services to the Vanguard Funds. The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by the funds it services and thus indirectly by the shareholders in those funds. POA may recommend the purchase of Vanguard Funds serviced by Vanguard. Because the advice provided by POA may include recommendations to hold or purchase Vanguard Funds, acting in accordance with such advice will subject the participant to the expense ratios charged by any Vanguard Funds held in the investor's account, as well as any purchase or redemption fees assessed by those Vanguard Funds.
Vanguard Marketing Corporation
Shares of the Vanguard Funds are marketed and distributed by Vanguard Marketing Corporation ("VMC"), a registered broker-dealer that is a wholly owned subsidiary of Vanguard, and an affiliate of VAI. VMC's marketing and distribution services are conducted on an at-cost basis in accordance with the terms and conditions of a 1981 exemptive order from the SEC, which permits Vanguard Funds to internalize and jointly finance such activities. Each Vanguard Fund (other than a fund of funds) or each share class of a Fund (in the case of a fund with multiple share classes) pays its allocated share of VMC's marketing costs. VMC does not receive transaction-based compensation in connection with the distribution of the Vanguard Funds.
When giving advice to clients, VAI will recommend the purchase of Vanguard Funds distributed by VAI's affiliate, VMC. Since VMC performs its marketing and distribution services on an at-cost basis and does not receive transaction-based compensation in connection with the distribution of the Vanguard Funds, no competing interests arise from VAI's affiliation with VMC. Certain members of VAI's management are registered representatives of VMC.
Vanguard Fiduciary Trust Company
VAI is also affiliated with Vanguard Fiduciary Trust Company ("VFTC"), a limited-purpose trust company incorporated under the banking laws of the Commonwealth of Pennsylvania and a wholly owned subsidiary of Vanguard. VFTC serves as trustee and investment advisor for certain collective investment funds and collective investment trusts offered by Vanguard as eligible investment options by some retirement plans. POA may recommend the purchase of Vanguard collective investment trusts serviced by VAI's affiliate, VFTC.
Financial Engines Advisors LLC
The Vanguard Group has engaged Financial Engines Advisors LLC ("Financial Engines") to provide subadvisory services to POA. Financial Engines is an independent, third-party, federally registered investment advisor that does not sell investments or receive commission for the investments it recommends.
VAI operates under a Code of Ethics that complies with Rule 17j-1 of the Investment Company Act of 1940 and Rule 204A-1 of the Investment Advisers Act of 1940.
The Code sets forth fiduciary standards that apply to all employees, incorporates Vanguard's insider trading policy, and governs outside employment and receipt of gifts. Additionally, the Code restricts the personal securities trading of Vanguard employees, as well as reporting requirements. The trading restrictions and reporting requirements are more involved for employees that have access to information about Vanguard Fund trading activity or Vanguard client trading activity and are designed to ensure that Vanguard employees do not misuse Vanguard Fund or client information for their own benefit.
Vanguard will provide a free copy of its Code of Ethics to any client or prospective client upon request.
Please see Other financial industry activities and affiliations for a discussion of VAI's affiliations with other Vanguard entities and how those affiliations may impact clients of VAI.
The interactive advice tools, including POA, do not provide recommendations on individual securities, with the exception of Vanguard ETFs. VAI does not select or recommend broker-dealers for client transactions in connection with these services.
The interactive advice tools do not provide ongoing monitoring or reviews of accounts with the exception of the POA service.
POA reviews accounts in accordance with the forecasting and monitoring services mentioned above.
As owners of Vanguard Fund shares, VAI clients will receive or have access to communications with respect to those Vanguard Funds. These communications include transaction confirmations, quarterly account statements, prospectus updates, annual and semiannual reports, and proxy statements relating to their Vanguard Fund holdings (as appropriate), as well as general Vanguard newsletters, e-mails, and other communications.
VAI receives no economic benefits from persons who are not clients for providing investment advice or advisory services to its clients.
VAI does not directly or indirectly compensate any person who is not a supervised person for client referrals.
VAI does not have custody of client funds or securities through the interactive advice tools. The Vanguard Group, Inc., in its capacity as the transfer agent of the Vanguard Funds, sends quarterly, or more frequent, account statements directly to VAI clients. Clients should carefully review these account statements and contact Vanguard with any questions.
The interactive advice tools are intended to be point-in-time advisory services that provide recommendations to users based on user input. These tools do not exercise discretion over user accounts. POA does not have discretion over clients' accounts.
Under these services, VAI will not vote or exercise similar rights for client securities. For participants in employer-sponsored retirement plans, the responsibility for the exercise of all voting or similar rights associated with any security or other property held in the portfolio shall be outlined by the plan. The exercise of all voting rights associated with any security or other property held in the portfolio shall be the responsibility of the client. VAI will not advise or act for the client in any legal proceedings, including bankruptcies or class actions, involving securities held or previously held by the portfolio or the issuers of those securities. Proxies will be delivered to the client by the issuer of the security, the custodian, or its agent.
VAI is not aware of any financial condition that is reasonably likely to impair its ability to meet contractual commitments to clients.
VAI is a federally registered investment advisor.