Clearing up Confusion about Vanguard Brokerage's Clearing

Vanguard has made some of its brokerage clients nervous. The family has been mailing out notices to Vanguard Brokerage Services users saying that it will assume the services of its clearing agent in the near future. This has caused several investors to contact me or our discussion boards with questions. Some who received the notice are worried about the security of their accounts; others are confused and can't figure out if the impending change is good, bad, of neutral.

I looked into the matter earlier this year and concluded that, at worst, the development is neutral. By the middle of this year, Vanguard's brokerage unit plans to take over all of the nitty-gritty trade processing work that it has outsourced to Pershing LLC for roughly the past decade. That means Vanguard will start providing all of the trade clearing, settlement, and custody services that Pershing had provided. Vanguard maintains that the only thing its brokerage clients will notice is a different account number. The company started notifying customers of the change this year.

Vanguard mutual fund shareholders should not be affected by the change at all, unless they trade stocks, bonds, ETFs, or non-Vanguard funds through the brokerage.

The shock of the bear market and the revelation that Wall Street legend Bernie Madoff was really the perpetrator of the biggest Ponzi scheme in history has people nervous about their assets and brokers.

Vanguard, however, assures me that it has been considering this move for several years and has built up staff and gone through several simulations to ensure that it can pull it off without a hitch. It's the hope of Vanguard that bringing the service in-house will make it more user-friendly and cost-efficient.

As far as security goes, Vanguard will offer as much security as Pershing did. Vanguard brokerage clients are still covered by the Securities Investor Protection Corporation, which will try to get investors' securities and cash back if their broker goes bankrupt or otherwise fails. SIPC will use its own money to pay back as much as $500,000 per client of a failed brokerage.

The odds of Vanguard going under anytime soon are slim to none. Its overall assets under management have been hit by the market decline over the last year and a half, but it's one of the few fund families that have seen a consistent flow of new money come in its doors in the past year.

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