Vanguard: growth crisis or abandonment of its mission?
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By Dr. James M. Dahle, Founder of WCI
I’ve been a big fan of Vanguard since I had financial knowledge. Even though I’m an ardent capitalist, I still love the mutual ownership of Vanguard (the only mutual fund company). Since the funds own Vanguard and I own the funds, I own them, albeit in a very small and very indirect way. That’s not to say Vanguard didn’t have its issues. It certainly is. However, every few years someone posts an article about how Vanguard has “lost its way”. Reviews are almost always valid, but I don’t see them as pessimistic as most.
Has Vanguard lost its way?
The most recent article on this topic, by Morningstar’s John Rekenthaler, is similar to other articles (and dozens of Boglehead forum posts) on the subject. Like most, he idealized Vanguard’s founding as being all about St. Jack helping out the little guy. I love Jack Bogle as much as the next person, but it’s important to read his own words about the founding of Vanguard. It wasn’t ALL about helping the little guy. You can get all the details in his 2018 ‘Stay the Course’, but the gist is that Bogle had worked for the conservative Wellington Fund from 1951 upon leaving college until he became vice-president. executive in 1965. In 1966, it merged with the “1960s ARK funds”, called Thorndike, Doran, Paine & Lewis. Bogle became CEO of the combined company. It then collapsed in the early 1970s, Wellington lost 3/4 of its assets and Wellington Management Company’s share price plunged over 90%. Unsurprisingly, Bogle was fired.
Bogle was a smart guy, though. As far as I can tell, we only have the Bogle side of the story, but part of founding Vanguard involves a management dispute and legal wrangling (scheming?) over that firing. Basically, the only way for him to maintain control was to have the funds own the management company. So he did, and lo and behold, Vanguard was founded. Yes, it had the awesome side effect of a mutual fund company. And this idea of an index fund had been floating around in his head for a while and was quickly implemented. But knowing the REAL story certainly takes some of the shine out of the legend. I’m sure the story would be even less flattering if told by some of the other people involved rather than Jack.
My purpose in sharing this is not to disparage Jack or his later work in any way. It’s just to lower your expectations of Vanguard. Jack was human. Vanguard is just one company. And it probably never would have existed if Jack hadn’t had to struggle to keep his place there.
Problems at the forefront
Some people occasionally come out with various “evidence” that Vanguard has gone astray.
#1 Active management
Perhaps the funniest part is when people realize that Vanguard not only offers actively managed mutual funds, but promotes them both to the general public and to its advisory clients. Critics think it’s kind of a novelty. It’s not. Do you remember Wellington? Yeah, it’s still there (and since before the Great Depression):
Wellesley too. And Windsor. And Prime Cap. Vanguard constantly offers new actively managed funds. Some do well. Some do poorly. Those that do poorly end up being shut down, merged, and swept under the rug, just like every other actively managed mutual fund company. They have had “hedge fund-like” strategies, factor-based strategies, quantitative funds, private equity funds, and multi-manager strategies. Even Jack Bogle owned many stocks of actively managed mutual funds. Expect this to continue in the future. But don’t lose faith in Vanguard because of it. Vanguard has never been an index fund-only store.
#2 Avant-garde No longer the leader in low-cost
After a few decades, the trend away from active management towards passive management became very clear. The other major mutual fund/discount brokerage firms, including privately held Fidelity and public Charles Schwab, had to jump on board or remain in the dust. So they did. They have also started offering index funds. The funds weren’t as large, perhaps not as well managed, and didn’t benefit from Vanguard’s proprietary fund/ETF structure. But they could at least compete on price. First they lowered their expense ratios to be in the same neighborhood as Vanguard, then they went even lower than Vanguard. For a few funds, they even went to 0%.
The real competition turned out to be other companies that beat Vanguard in the ETF space, such as BlackRock (iShares) and SSGA (SPDRS). Low cost, passive management and ETF package. . . what’s not to like? Of course there were a lot of
crooks entrepreneurs who pull out their high-cost index funds and work their way into 401(k), and Fidelity and Schwab certainly have plenty of not-so-good investment deals for investors. However, the top four or five companies that offer reasonable low-cost passive investing have finally risen to the top. Now, their offerings are all basically the same. Does that mean Vanguard got lost? Of course not. It means he forced the industry to change. This is what victory looks like! Imitation is the sincerest form of flattery. Just be happy to have more options for your 401(k) or HSA or for tax loss harvesting or otherwise.
#3 Cutting Edge Customer Support
The Bogleheads have been complaining about it for years, and it’s not just anecdotal. Vanguard apparently had a habit of picking up in all three rings. Now you could literally be on hold for hours (make sure your cell phone is charged and you have something else to do when you call). You may have a bad customer service experience at Fidelity or Schwab, but that’s less likely. The good news? With ETF Revolution, you don’t need to use Vanguard. You can own funds created by Fidelity, Schwab, or BlackRock, and you can own Vanguard funds (usually the ETF version) at Fidelity, Schwab, or any other brokerage your heart desires. Vanguard funds and top-notch customer service, what’s not to love? Let’s be honest, people go to Vanguard for the low price, not the customer service. All this is not so new in my opinion. Vanguard customer service wasn’t great in 2005 when I transferred money there, and it still isn’t. Rekenthaler speculates:
“Certainly, outsiders cannot know whether Vanguard’s customer service issues occurred because the company did not have the assets to pay for necessary upgrades, or because of poor management, or because of a calculated business decision. Some organizations have chosen not to answer their phones for routine calls, believing that the cost savings outweigh the reputational damage. (Try to reach someone at Uber. I challenge you.) Maybe Vanguard is in that group.
However, I think this is a case of wrongdoing best explained by incompetence. It’s just growing pains. Vanguard is the world’s third-largest mutual fund company by assets under management (BlackRock and Charles Schwab are slightly ahead). BlackRock does not offer individual accounts like Vanguard. Vanguard got to this level very quickly. Scaling a business is a lot harder than it looks, especially when you’re trying to run the business at cost. Schwab adopted much of what worked well at Vanguard. It’s time for Vanguard to do the same!
#4 Offer advice
Vanguard is also frequently criticized for its advice, despite the fact that it does so with a 70% discount to the industry standard fee of 1% of assets under management (AUM). My beef with the Vanguard advisory service isn’t the price or even the fact that it now has funds only available to its advisory clients. It’s the fact that you simply can’t offer personalized, high-quality financial planning and investment management for 0.3% of a $100,000 portfolio. People have far too high expectations of what they should get for their $300 a year. What you get at Vanguard is to make sure you don’t have a stupid portfolio and that your portfolio is rebalanced periodically. Anything useful beyond that should be considered icing on the cake. This is a product for the masses designed to compete with robo-advisors, not a serious competitor for a real financial advisor.
#5 Avant-garde Targeting the pension fund debacle
I have discussed the royal tax fiasco with the Vanguard Target Retirement Funds in detail elsewhere. I was not surprised to see the opening of a class action on this subject. Those who held these funds in a taxable account (although everyone I know advises against doing so) really paid an unexpected price for something Vanguard did. Whether knowingly or unknowingly, the pain was very real. Perhaps worse than the actual tax hit was Vanguard’s sense of betrayal, which put institutional investors ahead of individual investors. I was as disappointed as anyone else, but again I think it was probably more down to incompetence than malfeasance. I don’t expect this to happen again, and while I will have to pay (as one of Vanguard’s owners) to defend myself against the lawsuit, it should remind Vanguard executives of the importance of thinking to unforeseen consequences.
To date, I have the following accounts at the following companies:
- Vanguard: Trust brokerage account, Roth IRA for all family members, four UTMAs, DAF (Vanguard Charitable)
- Loyalty: WCI 401(k), HSA and a credit card
- Schwab: 401(k) partnership and cash balance plan
- Savings Plan: Military 401(k)
- Utah 529: four 529
- Various real estate companies: Numerous private funds and syndications
Obviously, I’m still investing in Vanguard, but I’ll admit that probably has at least as much to do with inertia as low costs and the appreciation of Jack Bogle and mutual ownership. However, I am well aware that there are many product lines that Vanguard do about as good as the others or worse. It wouldn’t break my heart to have to transfer everything to Fidelity or Schwab. I’m not sure Vanguard would mind either!
What do you think? Did Vanguard get lost? Why or why not? Have you had any surprisingly bad or good experiences with Vanguard? Comments below!