Vanguard Leads Fund Companies in Client Loyalty

More than two-thirds of major mutual fund companies have negative customer loyalty scores, according to a recent study by Cogent Research.
Cogent Research’s Investor Brandscape: 2007 report shows that although recent investment performance is the leading driver of mutual fund satisfaction, consistency of performance is the most significant driver of loyalty.
Twenty-seven of the thirty-eight mutual fund companies analyzed received negative loyalty scores, meaning these firms have more detractors than supporters. Moreover, the overall average loyalty score for the 38 fund groups was -12. There was a 98-point range in customer loyalty scores from the highest positive-scoring firm (44) to the lowest negative-scoring firm (-54).

“The fact that the average mutual fund customer loyalty score is negative reflects a highly competitive industry in which only a handful of fund groups have been able to produce the kind of consistent long-term performance required to earn client loyalty,’ said Chris Brown, managing director of the Wealth Management Practice at Cogent Research LLC, in a press release.
To calculate customer loyalty for the mutual fund companies, Cogent surveyed customers about their intention to recommend the fund firms to friends and family. Intention was measured on a scale of 1 to 10 with 1 indicating “definitely not recommend’ and 10 meaning “definitely recommend.’ Based on their answers, investors were grouped into three categories – supporters (scores of 9-10), detractors (scores of 1-5), and those that are ambivalent (scores of 6-8); the mutual fund company loyalty scores are a variance measurement of client supporters versus detractors.

Fund Families

The 38 mutual fund families were divided into four categories: stars, leaders, players, and drifters. The four firms in the Star category had customer loyalty scores of over 20, with Vanguard the clear leader with a customer loyalty score of 44.

Eighteen firms received Leader scores, though 11 of these generated negative customer loyalty scores. The rest of the firms were evenly split between the Player and Drifter groups.

Those in the Player category were a mix of traditionally advisor-sold and direct-marketed fund groups, such as Merrill Lynch/BlackRock, Morgan Stanley Investment Advisors, American Century, Calamos, PIMCO, and Janus. According to the report, “for mutual fund companies that distribute products mainly through advisers, there is a strong possibility that the firm’s loyalty among advisers is distinctly stronger. For these firms, generating high loyalty among advisors is far more important to future success than investor loyalty.’

Cogent said several of the fund companies that earned the Drifter level customer loyalty scores were caught up in recent mutual fund industry scandals, including Putnam, which with a customer loyalty score of -54, was the lowest rated firm.

Interestingly, Cogent said that they performed a similar analysis of 23 investment distributors, all of which earned positive customer loyalty scores. The analysis showed an average distributor customer loyalty score of 36 and only an 8-point range between the highest and lowest scoring firm.

Ongoing Satisfaction

In examining overall investor satisfaction with the mutual funds, Cogent found that the primary driver of overall investor satisfaction was recent investment performance but that loyalty and intent to recommend was mostly driven by consistent investment performance, followed by company investment philosophy and management style, and individual fund managers.

As perceptions of firms’ performance consistency rise, so too does client loyalty, leading to improved client retention and profitability, according to Cogent. The research report states that mutual fund companies that earned above average ratings for performance consistency, but have a negative customer loyalty score likely earned low marks for other important loyalty drivers, such as investment philosophy and management style, and individual fund managers.

The three firms that received the highest ratings for consistency of fund performance among affluent and high net worth investors are Dodge & Cox (78% of investors rated the firm 8 or higher on a 10-point scale), American Funds (66%), and Schwab/Laudus Funds (65%). Cogent reported that Dodge & Cox also ranked highest in recent investment performance, with 77% of investors rating the firm 8 or higher.

Cogent’s research is based on an online survey of 4,000 U.S. adults who hold mutual funds and have at least $100,000 in investable assets (excluding real estate), with significant participation of high net worth investors with more than $2 million in investable assets.

More information about the study is available at From the home page, you can click on “What’s New” in the upper right corner to access information about the study.