Vanguard Thoughts: Pros and Cons from a 15-Year Client-Owner

Vanguard has been sucking up assets like a vacuum, with total assets now exceeding $4 trillion. Their hybrid robo-advisor Vanguard Personal Advisor Services has over $65 billion in assets under management. Are they unbeatable? People tend to love building things up, then love tearing it down.

Vanguard holds the majority of my net worth, grown over 15 years in Vanguard brokerage accounts and Vanguard mutual funds/ETFs. You could therefore call me a fanboy, but also a concerned “client-owner” (I prefer the term “investor-owner”). As they keep hounding me to vote on their proxy, here’s what I like the most and least about Vanguard:

Pros

• Historical track record. Vanguard has a long history of providing investments at a low cost. When they arrive to an asset class, costs tend to drop like a rock. This the Vanguard Effect.
• Skill and experience. They are good at what they do – run low-cost index funds and low-cost actively-managed funds. They understand things like reducing index tracking error and utilizing securities lending to boost fund returns.
• Ownership structure. Vanguard does have a unique ownership structure conducive to continuing to maintaining low costs. There are no outside shareholders or activist hedge funds working to squeeze out every last drop of profit.
• Profitable. Vanguard has their current expense ratios and is actually making money (or technically breaking even) on every single fund and ETF. The others are losing money on their “cheap” products while they try to make money elsewhere.
• Less company risk. All the above adds up to my opinion that Vanguard has the best chance of future, ongoing lower costs. A potential cost beyond expense ratios that should be considered is the cost of switching to a different fund in a taxable account. If I sell now to buy something else, I will have to pay taxes on a significant amount of capital gains. I want to minimize the chance of having to do that.

Cons

• Lack of transparency on marketing costs. Vanguard runs a lot more advertising than they used to. I might argue too much, but nobody knows how much they are spending because they don’t disclose this even to their “investor-owners”. Vanguard is not a non-profit, but I have seen even non-profits suffer from internal bloat and having quality suffer in the pursuit of growth.
• Lack of transparency on executive compensation. Vanguard may not have outside shareholders, but we also don’t know how much money the CEO or other executives make. If Vanguard were a publicly-traded company like Schwab, they would have to disclose these numbers. As “investor-owners”, I don’t get told anything. As this Bloomberg article states, “Vanguard is an important shareholder voice on executive pay, but it isn’t transparent on its own compensation.”
• Mediocre customer service. Vanguard has struggled with the quality and responsiveness of their customer service as they have grown in size. My interactions with Fidelity and Schwab have consistently produced faster response times and more accurate levels of service. Vanguard themselves have admitted that they have had struggles in this area.
• Not necessarily the cheapest at any given moment. If you look at any specific ETF benchmark at any specific moment in time these days, the cheapest offering might come from Vanguard, but it just as likely might come from Schwab, iShares, or Fidelity.

Financial author Jonathan Clements argues in his Protection Money article that he is willing to a little bit more for Vanguard ETFs in order to avoid potentially having to pay significant capital gains if the loss-leader pricing trend stops. I think that is a very valid argument.

Now, you could also buy Vanguard ETFs inside another brokerage account. However, you may have to contend with trade commissions. A few exceptions on ETFs: Merrill Edge and Bank of America will give you 30 free trades a month if you have $50,000 in combined assets at BofA and Merrill (plus better credit card rewards). The Robinhood app lets anyone invest with free commissions (although I’d expect even less than Vanguard in terms of customer service). You can transfer Vanguard ETFs to another custodian for a flat fee if you wish to avoid realized capital gains.

Big picture. Vanguard changed the investment world, but now the gap is much narrower. I started out with Vanguard and think they still have the best long-term structure, so I own Vanguard mutual funds and ETFs. However, Schwab and iShares Core ETFs held somewhere with low trading costs and good customer service are also very good choices for someone starting out. This group of “nearly as good” alternatives to Vanguard continues to grow. Meanwhile, there is still another large group of “definitely worse” alternatives. Debating between 0.01% is rather useless when there are still people paying 1% or more for index funds.