Why we advertise
It’s a question we hear from time to time on this blog, as well as through e-mails, letters, and phone calls: “Why does Vanguard advertise?”
It’s a fair question. And believe me, it’s a topic debated vigorously by Vanguard’s leadership team. Given the fact that the expense is ultimately borne by the shareholders in our funds, which in turn are the sole owners of Vanguard, one might well ask, in the words of one client—“Why spend some of my money to attract some other investor?”
Our advertising budget is modest and always has been. But we do spend money to advertise, and here are three reasons why—along with a suggestion for how shareholders like you can help us make advertising obsolete.
Reason 1: Spreading the word
Many investors who should know about Vanguard don’t. And many others may have heard something about us, but don’t understand what makes Vanguard a different kind of investment firm—our client-owned structure; our long-term and consistent investment philosophy; and our focus on providing low-cost, balanced, and diversified investment portfolios. Advertising can help these “Vanguardish” investors find Vanguard.
Indeed, over the years, some of our most loyal clients have criticized us for not doing more to spread the word. They’re almost indignant that Vanguard is “out-shouted” by competitors who advertise far more than we do.
Reason 2: Economies of scale
In the investment business, size matters. As assets rise, some operating costs fall—for example, the fees that mutual funds pay to custodian banks. A larger asset base means that the costs of doing business can be spread more thinly (costs such as computer technology and systems, investment-management fees, accounting, and other services).
As new investors choose Vanguard and entrust their savings to us, they—and our existing clients—benefit from the economies of scale achieved. At Vanguard, the point of attracting new clients is to reduce costs for everyone in the long run. And we’re uniquely positioned to make that happen. That’s because we operate “at cost,” so economies of scale flow right back to fund shareholders in the form of lower expense ratios.
Reason 3: New assets for old
Our clients are far more loyal than the typical mutual fund firm’s shareholders. In fact, redemptions out of Vanguard funds occur at less than half the rate for the industry as a whole. But since the whole point of investing (for most of us, anyway) is to eventually spend the money we’ve invested for retirement or college or another goal, money does flow out of Vanguard as well as in. Advertising helps make up for those “withdrawals.”
Our best form of advertising
Our most effective advertising isn’t really advertising at all. Our primary source of new clients has always been referrals from existing clients—friends telling friends about Vanguard, relatives clueing in each other at family gatherings, finance professors telling their students, and so on. This word of mouth remains absolutely vital. And it’s how traditional advertising could become unnecessary—if enough investors became familiar with Vanguard.
In the meantime, as with other spending decisions at Vanguard, advertising plans are scrutinized for efficiency and effectiveness. Our funds’ low expense ratios mean that the revenue we derive from each dollar invested with us is lower than for most of our competitors. Therefore, we have to be more efficient with our advertising expenditures.
We can’t afford to utter the lament attributed to department store founder John Wanamaker: “Half the money I spend on advertising is wasted. The trouble is, I don’t know which half.”
Note: The link to Wikipedia will open a new browser window. Vanguard accepts no responsibility for content on third-party websites.
What is the actual amount spent on advertising per year?
How is advertising effectiveness measured by Vanguard?
How does Vanguard make sure that one shareholder group does not subsidize another (i.e. do you ever promote specific funds,for example, or is the advertising generic)?
Will we ever see Vanguard advertise on the SuperBowl?
I found Vanguard through a referral from an existing client over 25 years ago. I am often more persuaded to buy/invest through referrals from trusted sources than from advertising. Stick with a modest advertising budget. I am quick to recommend Vanguard to my relatives and friends. I explain to them why Vanguard is a very good choice but unfortunately a few have to learn the hard way.
About your reasons for advertising: 1. and 2. are reasonable, but must be justified over time by studies of results. Can Vanguard say that economies of scale have more than compensated existing shareholders for advertising expenditures? I would note that these are arguments that have been used historically to justify 12-b1 fees. I would hope Vanguard would not move in that direction.
I found Vanguard due to it being used by our state’s 529 plan. Then the “penny dropped” about expense ratios.
If I had seen a Vanguard advertisement before then, I probably tuned it out as just another financial institution. Now that I see the advertisements I see they make the point, so maybe they can be effective.
One way Vanguard can greatly increase its client base is to be used in more retirement plans. This means persuading states, institutions, employers, etc. (rather than individuals) to make Vanguard an option. My employer offers a choice of four providers for the 403(b) plan, one of whom has expense ratios “only” 3 times higher than Vanguard’s (the other three providers are much higher still). Employees would flock to Vanguard if they had the option; informing them is the easy part.
How would you determine when “enough” people have become familiar with Vanguard?
“Half the money I spend on advertising is wasted, and the problem is I do not know which half”- Lord Leverhulme 1851-1925, British founder of Unilever and philanthropist.
If the best form of advertising is people telling each other about Vanguard, perhaps you can create some incentives — financial, recognition or otherwise — to encourage us to do so.
You mentioned that Vanguard has a “client-owned structure”. However, as a long-term Vanguard client, I have never had the opportunity to vote on Vanguard board of director positions or other issues affecting shareholders.
Exactly how do the clients, the owners, inflence Vanguard management?
I agree with advertising. I’m amazed at people who have little money to people whom have amassed a lot in 401K’s and are retiring don’t know where, when, or how to put their money in IRA’s. Your advertising is simple basic and to the point being the industry low cost provider. I spread the word to anyone who will listen.
I wonder if part of the rationale is that advertising in the financial press leads to Vanguard being mentioned in articles about investing? I don’t recall being aware of Vanguard advertising when I was starting out as an investor. I do remember reading an article in the financial press about their exceptionally low costs. That definitely caught my attention.
I notice one respondent wanted to know how much is spent on advertising. That’s not an unreasonable question. I’d be interested to know how that relates to the total amount of money invested in Vanguard. When we’re talking of hundreds of billions of dollars being managed, an advertising budget even in the tens of millions seems rather small. But we really don’t know what those numbers are, do we?
But, like another respondent noted, consistent, superior performance is the best type of advertising.
I’ve only heard Vanguard advertise on npr, so I don’t consider that a bad place to advertise. It helped me to feel more comfortable to invest here because of that underwriting. I consider npr to be a trusted source and wouldn’t have had the same response to an ad in many other sources.
Do a lot of people complain about Vanguard’s advertising? I find no problem with it. Also, remember advertising/marketing is more than just commercials. Vanguard’s web site, logo, this blog – all advertising, all require money, all essential. From Pennsylvania to Kansas, continue to spread the word through advertising.
Bringing more assets to Vanguard funds can add a cost to current investors. It can cause asset bloat in some types of funds. Large inflows into some bond funds can reduce returns for current investors. Vanguard has closed or limited additional investments in some of its funds which has an opportunity cost for current investors. There are limits to good ideas and good opportunities in investing.
Maybe we should be a little more greedy and not spread the news so widely.
When total assets under management increase, either 1) the size of individual funds increase, thereby eventually encountering diseconomies of scale, or 2) the number of funds increases thereby requiring more managers or diluting the attention of existing managers.
So NO! I don’t like your spending my money to spread the word.
I would really like to see Vanguard recruit more major companies to administer their 401k’s. This option would be a great benefit to Vanguard and many baby boomers that are expecting to retire in the upcoming years. My first decision in retirement will be to roll all of my 401k into Vanguard. Maybe more ad dollars should be directed this way?
I am not persuaded by Mr. Stock’s reasons to advertise. It seems to me that Vanguard is caught up in glory of being the biggest mutual fund company. How about asking shareholders if they support a one or two year suspension of advertising? I would vote to suspend. Vanguard manages plenty of assets to optimize efficiency of scale. If net cash flow is negative after suspension and if that negatively affects the bottom line for investors then start advertising again.
I would definitely like to see advertising suspended for 1-2 years or better yet indefinitely. Mr. Bogle sold us on the gospel of cost.
Why urge V to solicit “more major companies” to administer 401ks? What problem are you trying to solve?
Some of the best advertising comes from making existing shareholders happy. Every three months, you used to send me a document showing the performance of all the Vanguard funds for the past 1, 5, and 10 years. That was good information. Why don’t you send me that document any more?
I agree with Mr. Stocks view that Vanguard should continue to advertise due to the benefits related to economies of scale. As Vanguard increases its customer base, V can obtain more advantageous pricing from suppliers and vendors. Additionally, being the largest mutual fund provider has its advantages as you can use your “muscle” to obtain better terms.
Everyone should support V’s efforts to obtain additional 401K business as it is a very profitable revenue stream that supplements more traditional income thus lowering costs to all shareholders. Not only that, the 401k customers can be on boarded more cheaply than traditional clients and those clients will typically buy/utilize other Vanguard products and services. At the very least, 80% or more of those clients will Rollover their 401K and leave it with Vanguard.
My option is that everyone on this board would vote in favor of additional clients vs the reverse situation where V is losing clients. Imagine the costs associated with a negative net inflow of clients!
I don’t feel like an owner, or a partial owner, just a customer. A pretty happy one, but for Vanguard, and insurance co’s, to go acting like we are more than that is just a joke.
I would support a modest advertising budget. As a client owner I would not want to see Vanguard become the GEICO of the mutual fund industry. (I think GEICO is an advertising agency that sells insurance on the side. I’d love to know how much of their customers’ premiums go to GEICO’s ubiquitous advertising.) The reason I have referred friends to Vanguard (including one who opened up an account within the last month) is that Vanguard is well-managed with the client-owner in mind. I would hate to see Vanguard take any steps in the direction of the abysmal mutual fund industry prevailing standards with regard to expenses and customer chasing contrary to the interests of their existing customers.
This is a very well written and persuasive communication in defense of your advertising policies. As a print advertising sales director for more than 30 years, I give it an A+. I may even be able to steal a point or two for use in my own future presentations, although I run an ad sales program for a welding publication, not an investment company.. The writing in your blog is crystal clear and I am sure a lot of effort went into it. Nice job! P.S. I have been a Vanguard investor for about 24 years and have always felt the Vanguard product was/is first rate.
We’ll take your word for it that advertising is beneficial to current customers. After all, you know a lot more about running a mutual fund company than we do. But, as in any type of business, too much of anything can cause diminishing returns. With advertising I’ve always felt that it is better to error on the side of not enough rather than too much.
I turned on NPR tonight to hear why they fired Juan Williams.
They did not say why they fired him.
I heard later that Mr. Soros has given NPR 1.8 million dollars and that he does not like Fox.
Williams was fired by NPR for what he said on Fox. A connection?
To my surprise Vanguard supported NPR tonight.
Shame on you for allowing your clients dollars to be spent supporting a left wing organization that fires a good, honest liberal commentator man for honestly expressing his feelings on Fox.
Shame on Vanguard. Shame on you all.
As a defector from Fidelity Investments, I would like to suggest that Vanguard stop spending our money on advertising. Vanguard, the largest firm, has economies of scale.
To grow Vanguard, contact clients for help with socially-responsible ETF’s (i.e. omit Shell, Nestle, BP, etc.). Promote interest by letting investors select which candidates should go into a social ETF: The controversy will generate advertising. Put the discussion on Facebook, already the 3rd largest “nation” on earth.
Improve the web site: Vanguard’s contract with Financial Engines does not include Vanguard’s own ETF’s; the web site does not show the Treynor or Sharpe ratios to allow performance-comparisons over long periods such as several business-cycles.