Yes, Virginia, we really are client-owned
While listening to groups of investors recently as part of some research, we learned something that was, to us, a bit disappointing.
And thereby hangs a tale.
One thing the research confirmed is that even a good number of Vanguard clients don’t know the single most important thing to know about Vanguard.
And that’s this: Unlike all other mutual fund companies, Vanguard is client-owned. The clients who put their dollars in our mutual funds are the owners of those funds. And those funds, in turn, own Vanguard. The bottom line: Vanguard does not make a profit from operating our mutual funds.
OK, so it’s not surprising that investors with busy lives to lead don’t know about Vanguard’s corporate structure. What is a bit surprising is that, even when investors patiently listen to and understand the explanation, they tend not to believe it.
“Somebody at Vanguard has to be taking the profits out of the operation,” was the skeptical view.
I suppose folks have plenty of reasons to be skeptical about financial companies. But we really are client-owned.
No one, other than the funds and their shareholders, owns a piece of Vanguard. Nobody. Our CEO, Bill McNabb, and even our founder, Jack Bogle, are client-owners in exactly the way you are. We really are the only mutual mutual fund company.
So, why is this client-owned stuff so important? It’s important because that structure dictates everything else about Vanguard.
Because the clients, through the various mutual funds, own the enterprise, Vanguard operates at cost. Each fund pays a portion of Vanguard’s expenses—for salaries, facilities, computers, operating capital, etc. But the fund expenses don’t go to provide profits to an owner of Vanguard, because the funds are the owners. The funds and their shareholders keep the money that would go to profits at a typical mutual fund sponsor.
Thus client ownership leads to operating at cost, which leads to lower expense ratios for the funds. And lower expenses are important, because low costs keep more of your money working for you.
Even our investment philosophy flows from being client-owned. We advocate basic—even boring—investment principles like being diversified and balanced and taking a long-term perspective because we’ve found those elements tend to work.
It’s harder for investors with unbalanced portfolios to stick with a long-term investment program. An unbalanced portfolio—all stocks or all bonds or all cash—will perform well in certain conditions, then poorly in others.
If you’re working for your client-owners, you have no incentive to tempt them with investment concepts that may have sizzle but little substance. You have no reason to tout the returns of your hottest-performing funds, which sooner or later will cool off. You have every incentive to put the client-owner’s interests first, because there is no conflict with the interest of the investor who, through his or her fund shares, owns the mutual fund’s management company.
Once you understand the links—from client ownership to at-cost operations to low costs to an enduring investment philosophy—we hope it all makes sense. Even for the skeptics.
Notes:
- All investments are subject to risk. Investments in bonds and bond funds are subject to interest rate, credit, and inflation risk. Diversification does not ensure a profit or protect against a loss in a declining market.
- Vanguard provides services to the Vanguard funds at cost. More information about Vanguard funds, including at-cost services, is available in each fund’s prospectus.
Hooray for Jack Bogle, who started it all and thereby gave investors a “fair shake.”
I’m glad you wrote an article on this. I never quite understood it. It’s certainly not ownership in the same regard as “I own my car”. The external firms that manage some funds (e.g. Frontier Capital, Wellington Management), as well as Vanguard employees somehow must make a profit — they aren’t working for free. I’m guessing those salaries are considered costs? What keeps these reasonable, especially since the external firms likely aren’t owners?
Sounds like how a credit union is structured.
While I have benefited from Vanguard’s structure-I was struck by your statement-
‘We really are the only mutual mutual fund company.”
Could you explain how Vanguard is different, in regards to ownership, from TIAA-CREF?
How are the board of directors selected? At other client-owned companies like AAA or my credit union I’ve received voting instructions.
There are no de jure stockholders of Vanguard Investments. What keeps the cost of managing the funds down is the force of competition arising from man’s pursuit of profits.
There is no force known as the market. There is only Mother Nature and Man’s Nature.
It is true that vanguard does not make a “profit” on their investor’s money per se, however all the salaries, expenses, etc are paid using the dollars of its “client-owners”. When one manager’s fund(s) perform well on a consistent basis it is fair to assume that they would receive a raise. Where does this money come from? The “client-owners”.
Vanguard determines what its “profit” will be (through a fund’s expense ratio) in proportion to how much it feels it’s “client-owners” are willing to pay for their services. Therefore Vanguard makes its money by having quality funds in which people desire to continue to invest more and more of their money. Yes, Craig, you do not make money by having your “client-owners” investing in one fund over the other but as long as they invest in Vanguard you will remain employed. Not an earth-shattering blog submission, Virginia.
I am indifferent to corporate structure as I cannot change it. I can only do my best to find where and how I can get the best bang for MY buck.
Thanks for excellent service and a quality product at a competitive price. When those things change I am out of here.
It is my hope that the new “Vanguarding” marketing campaign will more effectively communicate the benefits of investing with Vanguard. You are making more clear statements on your website like, “Vanguarding is having profits come back to you”, which may better help inform the public.
To the March 25 commenter:
You are right that external management firms make money off Vanguard investors. We pay them a fee. It is often something like .25% of assets under management (one quarter of one cent for every hundred dollars under managament.) This is the going rate for these managers of large amounts of money (we’re talking billion+ dollar accounts here; not someone’s $2,000 IRA contribution).
The rest of the funds’ operating expenses (which are shown clearly for every fund) cover things like the Vanguard salaries, bricks and mortar, advertising, postage, etc. Vanguard index funds and bond funds, unlike funds like Windsor, don’t have external managers–just Vanguard employees. The result is that the costs on these funds are even lower (often .20% of so).
What makes this all possible is the fact that we indirectly own Vanguard–there are no outside shareholders; you can’t buy Vanguard’s stock because there is no stock. Vanguard reports to us, and we want to make sure that they keep our costs low since we benefit directly from the low costs. If Vanguard were a for-profit company owned by shareholders, these shareholders would insist that Vanguard charge the customers (us) more, so that the price of the stock would increase. In order to turn this profit, Vanguard would have to spend more money on marketing, especially on wining and dining retail financial advisers, who sell people their stocks and mutual funds, and make large amounts of money in so…
To address the March 25, 2010 at 9:40 pm comment “What keeps these [costs] reasonable…?” Short answer: marketplace competition. Think of it this way, neither Vanguard nor any other company would hire someone @ $200k / year if another person with equal qualifications was willing and available to do the same job @ $150k / year. Same basic principle applies to Vanguard “hiring” outside firms. Kudos to Vanguard for aligning their corporate motivations with investor’s best interests.
OK, I have long understood this. I think Vanguard is a great company. Whenever I think about it, I pray it stays as un-corrupt as it is. But a few questions:
1) How much does CEO McNabb make and how is his compensation structured.
2) How about the compensation packages for the Directors?
3) How about the top 100 compensated employees?
4) What is a “principal?”
5) What keeps the people who do research for the bond funds, and those who run them, from buying dangerous instruments?
Mr. Bogle’s book, Enough, explains more about this as well. Why “Virginia” in the title? I guess that’s better than “Northern Iowa.”
I agree with March 28 7:10 p.m., as an investor/owner, it would be nice to know what the compensation is for the top people.
How would Vanguard’s unusual ownership structure affect things if the Prime Money Market Fund were at risk of breaking the buck? When other mutual fund sponsors have a money market fund at risk of breaking the buck, they have put up their own funds so as not to risk the bad rep of breaking the buck. I assume those moneys come from the mutual fund sponsor’s corporate equity. But with Vanguard’s structure, where is there capital available to bail out the money market fund?
I disagree with comment #10 from March 27 at 4:56 am. The quantity of 0.25% does not equal one quarter of one cent for every hundred dollars. It equals one quarter of one cent for every dollar. Or, it equals 25 cents for every hundred dollars.
It amazes me how some can put a twist on a presentation that can seem to ring true although it truly isn’t. When the “client owners” seek answers to what appears to be clearly over charging of the said “client owners”!
ie: Husband and wife, retired and having all their hard earned savings in a joint account with Vanguard. (who touts the advantage of such accts) But then are treated as individual clients and accounts when investing, this is ethicly wrong? Their hard earned savings should be considered in the aggregate in all areas to give maximum cost savings.
Why else a joint account and the trust of all their saving?
If a husband has more monies to acquire adm.shares (historical fact) his wife shares in the same fund should also be adm. shares. Please save the co-mingling comment.
Client owners should also have more imput in regards to how fund mgrs. vote proxies. The industry deserves far more blame for the last ten years then they want to accept and clearly wear blinders in this regard.
So many American couples only have their Vang. acct. and Soc.Sec. to count on for retirement and should be treated as one.
The obfuscation here is clear–while Vanguard is owned by the funds’ shareholders, the Board of Directors, which is rubber-stamped by the occasional proxy, determines what to pay its people–particularly the folks at the top. So, if all those salaries and bonuses are considered “costs” then Vanguard can say it “operates at cost.” But that’s not the same as saying it doesn’t operate at a profit. There are plenty of profits–it’s just a matter of how hard you push the “expense” lever down.
What could happen to change this corporate structure?
If all my retirement eggs go into the “Vanguard basket”, which has already started to take place and will be fully comptete withing 12 years, what assurance is there that this ship will not change course?
Having been a happy Vanguard investor for almost 10 years, I am a bit concerned about the recent ad campaign on Vanguarding, since all those front page ads in WSJ and other media expenditures can’t be cheap? For investors like me, it is like preaching to the choir. For other investors who don’t agree with Vanguard’s philosophy, I am not sure if an ad campaign like this can convert them anyway.
Since we own Vanguard why are we not informed of what we pay our employees?
Interesting comments. I have a few and some questions.
First, after a career as a CEO of a few firms and of being a business professor, I have my first cooperative company directorship (electrical power) after many for-profit ones. I am amazed at the drive to keep costs low and prices to customers at rock bottom. So I heartily approve of the Vanguard model.
Three questions, all asked before by other commentators. 1. What are the total compensation packages of the top 25 Vanguard people? 2. How does this compare with TIAA-CREF both for compensation and business model? 3. All business models need an excess of revenues over expenses to survive and fund growth: How does Vanguard handle this?
I truly appreciate having Vanguard to handle about a quarter of our estate with TIAA-CREF as another quarter and real estate, both homes and commercial, being about half. Having been retired for 14 years and having our net worth increase significantly during that time, gives my wife and I great comfort that we will not outlast our resources, ever become dependent on others, and leave some to our heirs. Thank you!!
I like Vanguard and I think they are a solid honest company and I have been with them for a long time. But I have never seen any compensation on the executives. Do we as clients have a say in what their compensation, benefits, etc are? What kind of inputs to running the company do clients have? Is there anything written on this?
Even though we are the owners we have no information on salaries paid to top Vanguard employees nor any information of what the directors are paid.
A coupe of years ago Vanguard raised the fee it paid to the Primecap group. Vanguard said it only raised the cost to the investor by .2% a year ( which was true) however they did not say that they were giving the PrimeCap group a 40% raise.
Even though we are the owners there is a lot of information Vanguard refuses to give out.
WHAT ARE YOU HIDING
Thank God there is a Vanguard for small investors. Please, Please don’t ever demutualize like so many other companies have!!
I felt the comment from April 3, 2010 at 12:18 pm to be very genuine. If same-sex couples have the benefits of being joint account holders etc., I can definitely support the validity of the claim that his joint vanguard a/c holder should be able to pool costs/purchases/benefits.
I got a kick from “I am indifferent to corporate structure as I cannot change it. I can only do my best to find where and how I can get the best bang for MY buck.
Thanks for excellent service and a quality product at a competitive price. When those things change I am out of here.” on March 26, 2010 at 4:35 pm.
In the spirit of the article above, and the spirit of Bogle’s pronouncements, I feel there are certain values that will keep me at Vanguard. All they need are unionized employees and I’m sold.
Thanks for the article - I set up a Vanguard account many, many years ago for my wife and me, then later changed the ownership to her only for estate planning purposes.
Through thick and thin, I’ve never ever been tempted by the siren songs of other investment fund companies and their promises to switch our assets at Vanguard.
More recently, I established a Vanguard brokerage account in my wife’s name. While the buy/sell fees may be a bit higher than the other ‘non brick and mortar’ firms, I know Vanguard will be there for my wife even if I’m no longer around for her.
This from an investor for about 10 years at Vanguard (90% IRA, 10% after-tax) - so far, so good. Compared to Schwab (my wife’s IRA) I get a lot less of the marketing material that I do not want.
Strictly business, thank you.
I’m sold.
My only comment is that management can still spend money unwisely even in the only “mutual” mutual fund company. I was in the insurance business, and I got very tired of hearing from regulators and Congress about how much better “mutual” insurance companies were than those awful “for profit” stock insurance companies. As I often asked them, “If my operating expense plus my profits are less than the mutual’s operating expenses, who is doing a better job for their customers?” I’m not suggesting you have lavish offices, inflated salaries or give a lot of money to the arts to make yourselves look good…but their are examples…Prudential Life Insurance (a “mutual” company), among others, comes to mind.
What’s your opinion?
1. VG should give direct answers on this blog re: the questions about Board and top earner compensation - even if the answer is that’s not public information.
2. Yes, the ‘operate at cost’ statement implies bare bones cost. VG should not get too cute with its advertising - just tell the truth about your structure without hyperbole.
3. I have no problem at all with top earners and other crew members being paid appropriately, given that VG truly is a better fund company and that I want the sharpest folks I can get watching my savings.
4. The ‘breaking the buck’ question is a good one worth answering.
5.
Sooner or later, everything about investing distills to TRUST. For now, Vanguard has proven to be the most trustworthy investment company I’ve encountered . And that trust has come with the side bonus of impressive performance. So long as management remains committed to the principals that have guided the company this far, I’ll stay.
The ownership aspect discussed and the resulting philosophy and low costs are the main reasons I am a Vanguard investor. However, I have a general concern that is related, and that is executive salaries in industries. I have always questioned whether a $20 million-dollar executive is really better than a $10 million-dollar executive. Is the better-paid one working twice as hard, or is the board simply paying off for short-term results and thereby encouraging more risk?
As the world’s largest mutual fund company, shouldn’t Vanguard have had some clout in reining in some of the excesses in salaries that led to excessive risk in the 2008 debacle? What policy does Vanguard follow in voting the shares in its funds? Do you try to influence company boards in this regard?
Ownership is irrelevant in one sense. If you are suspicious of smoke and mirrors you can settle everything very easily. If you can find a family of funds with better diversity, relative safety, good management, and net returns then take your money there. Vanguard’s 0.5 to 1% lower operating costs are quite a leg up on the competition. Who cares whether we own the company or someone else owns the company as long as the net returns are better than the competition. Where ownership matters, is stability, quality, and diversity, as well as great customer relations and service.
VG is indeed a great ‘mutual association’ and the general costs to individual investors are consistently lower than virtually any other fund provider.
The one thing that would provide greater transparancy and, I believe, reinforce the value of the VG brand would be to publish more details of the ‘costs’ incurred by each of the funds AND the overall VG ‘administrative umbrella’ [i.e., executive salaries, bonuses, perks, etc.].
Personally, I’m not mortified by the fact that most executives make large salaries/benefits/etc. - assuming that they are good at their jobs!
Publishing the nitty-gritty numbers would actually HELP fortify the VG brand creditability for reasonable people. Indees all except those who are eternally envious of the success of others - you know, the bashers of capitalism, ’share the wealth’ fanatics and lovers of the mythical ’social justice’.
Will VG executives live up to the challenge?
That’s a major reason I have my entire portfolio with Vanguard!
Been a fan and investor with Vanguard for many years. Lest anyone forget, the credit for what Vanguard was and is today goes to Bogle, 100%. Even today, when he talks, better listen.
Thanks for writing this. I didn’t know anything about it. It does appeal to me for the reasons that I like to shop at co-ops and use non-profits for services when possible.
PS — Someone asked, why did he use “Virginia” — this is Virginia, not the state, but from a famous essay that says, “Yes, Virginia, there really is a Santa Claus”. More here: http://en.wikipedia.org/wiki/Yes,_Virginia,_there_is_a_Santa_Claus
If Vanguard is “client owned” why don’t we know the salaries of its top officials the way we know the salaries of other companies that are stockholder owned?
So if Vanguard is client owned why doesn’t it treat clients like owners? Why doesn’t Vanguard publish an annual report on its web site detailing how it has done in terms of expense control, costs versus competitors (by meaniungful category under management control, detail why it is worthwhile for fund shareholders to subsidize the start up of brokerage operations or new funds, discuss strategic vision and plans, lay out how we should evaluate Vanguard management, detail management compensation and incentive olans and how success is measured, lay out total compensation for each of the highest paid executives etc., in short provide information generally provided in a 10k and proxy statement for a public company. Why shouldn’t Vanguard’s goal be to reduce expense ratios by 2 basis points / year, for example?
Please restructure this document with questions posed organized with adjacent responses.. or pending if no response yet (for example what,if any response to the compensation questions of levels and administration)
Sounds great and I applaud you. But I do have a question: What is the benefit to us owners when you advertise?
I like client owner structures because they take away the differing interests of more traditional structures. I belong to a food coop and also to a credit union. Even though there are some drawbacks, if it were available in my area I would also consider buying into a coop apartment. The closest thing is condominium, but the structure is not exactly the same as a coop apartment. Typicall client owned structures are more responsive to the clients.
Client owned and profits being reinvested is the very reason I choose Vanguard and why we don’t see Vanguard in the news with many of the other firms in this financial mess. Kudos to Bogle and for Vanguard for continuing this philosophy.
Ever since I read John Bogle’s first book and heard him describe Index funds and the market I have been sold on Vanguard. Yes, every once in a while I fall for some new “line” and put a bit of money into it but I always seem to return to Vanguard which has always held the large majority of my funds. I appreciate the low-key approach and the weath of correct information at the fingertips of your employees. Don’t change.
Why Vanguard never explains how the Board of Directors is constituted (elected or selected). If the Mutual fund holders are shareholders, why is no such shareholder ever asked to participate in constituting the Board?
I knew that Vanguard was client owned but didn’t really understand the ramifications. Thank you for this clear and concise explanation. I’ve been a VAnguard investor for many years and will continue to be.
Re. the comment posted March 27, 2010 at 4:56 am, stating that .25% is “one quarter of one cent for every hundred dollars under managament”. Really??!!! Wow, sounds like a great deal, where do I sign up? But seriously, I just hope the people at Vanguard who are actually managing my money are somewhat better at math than those who do planning & development.
I would like to see more disclosure in your quarterly statements regarding the actual $ amounts deducted from each fund investment for the period. (yes I can read the prospectus).
Additionally I would like to see the annual report and other information noted from investors blog comments.
Fund investors want the fund managers
(a) to maximize the fund returns and
(b) to minimize the fund costs.
Vanguard managers of the index funds match benchmark returns which they cannot control. They can control only the costs. Granted, Vanguard management fees are low relative to other mutual funds. But because the fees are fixed, the investor/owner does not have enough information to conclude that Vanguard managers indeed minimizes the costs.
Vanguard would probably make its investor/owner structure even more compelling if the index funds had a stated upper limit on the fee, say 15 basis points, and then tried to continuously reduce the costs and, consequently, the fees. As a result, the fees could vary month to months but remain below the limit. Quarterly or annually, Vanguard would publish both the stated upper bounds and the actual fees. The difference would indicate the cost-control efforts and how they benefit the investor/owner.
Another point concerns many fixed-income funds at Vanguard that are not indexed, actively managed and usually underperforming their benchmarks. A true investor/owner/manager would be running passive, indexed funds against the same benchmarks. These funds would perform better and cost less than the current funds. This is also a strong recommendation of the recently-published “Elements of Investing” by Ellis & Malkiel.
April 20-10
Does anyone know if Vanguard is regulated by the SEC the same as the other firms that are not client owned.