Has Vanguard Lost Its Way?

[absolutezero]

So back to the original question.

Vanguard still provide (mostly) passive funds/ETFs that track the indexes - and they do it cheaply and with minimal tracking error.

So no. I don't think they have lost their way.

[GeoffF100]

So back to the original question.

Vanguard still provide (mostly) passive funds/ETFs that track the indexes - and they do it cheaply and with minimal tracking error.

So no. I don't think they have lost their way.

I expect that most people would agree with you, but that does not make a debate. Perhaps I should act as Devil's advocate. You have not addressed the ethical issue. There are two possible positions that you could take. One is that that it is not unethical for Vanguard to sell active funds or advice, for example. The other is that you do not care. The second position is analogous to the online buyer of clothes who does not care about the conditions of the workers who made them.

[Lootman]

So back to the original question.

Vanguard still provide (mostly) passive funds/ETFs that track the indexes - and they do it cheaply and with minimal tracking error.

So no. I don't think they have lost their way.

I expect that most people would agree with you, but that does not make a debate. Perhaps I should act as Devil's advocate. You have not addressed the ethical issue. There are two possible positions that you could take. One is that that it is not unethical for Vanguard to sell active funds or advice, for example. The other is that you do not care. The second position is analogous to the online buyer of clothes who does not care about the conditions of the workers who made them.

There are a number of ethical issues around fund managers. I have worked for both UK and US fund managers and I have seen things that would rightfully make you recoil in horror. I could give you a whole list.

But there are two fund managers that I hold to be impeccable in ethical terms. One is Vanguard and the other is the founder of iShares (although I cannot personally speak about their current owner, Blackrock).

It is hard for fund managers and brokers right now (and Vanguard is also a major broker in the US as well as fund manager). Online commissions in the US are now zero, and the expense ratios on a good number of index funds are also zero. Vanguard has to make money somehow and so they are ramping up their advisory side. And at least in the US Vanguard has active funds, some of which have been very successful (e.g. Wellington) and at reasonable costs.

I have a significant sum with Vanguard and never worry about them.

[BT63]

.......Online commissions in the US are now zero, and the expense ratios on a good number of index funds are also zero......

Interesting.
But how is that sustainable?

[Lootman]

.......Online commissions in the US are now zero, and the expense ratios on a good number of index funds are also zero......

Interesting. But how is that sustainable?

A couple of ways. First we are seeing massive consolidation. For example Scottrade, a mid-sized broker, was swallowed up by TD Ameritrade a couple of years ago. And now TD Ameritrade is itself being bought by Schwab.

Morgan Stanley bought E*Trade. And so on. When margins become thin, you need very high volumes and AUM.

Secondly the brokers are moving into other related areas. So Schwab now has its own index funds, some at a zero TER. They will make money on the stock lending side. They are all seeking to develop their advisory side. They can still charge fees for retirement accounts. Some offer credit cards. And so on.

But it is tough. Trading is now a commodity that operates at a cost that approaches zero. Will we see that in the UK and, if so, what will that mean?

[GeoffF100]

I see the situation as analogous to that of the large supermarkets. They sell ethical products (e.g. fruit and veg), and they also sell unethical products (e.g. cigarettes, alcohol and junk food). If they did not sell the unethical products, I would be paying a lot more. In Vanguard's case, their questionable products (managed funds and advice) are generally less harmful (i.e. expensive) than those of the competition anyway.

[absolutezero]

. One is that that it is not unethical for Vanguard to sell active funds or advice, for example. The other is that you do not care.

Your second sentence sums it up.

[GeoffF100]

.......Online commissions in the US are now zero, and the expense ratios on a good number of index funds are also zero......

Interesting. But how is that sustainable?

A couple of ways. First we are seeing massive consolidation. For example Scottrade, a mid-sized broker, was swallowed up by TD Ameritrade a couple of years ago. And now TD Ameritrade is itself being bought by Schwab.

Morgan Stanley bought E*Trade. And so on. When margins become thin, you need very high volumes and AUM.

Secondly the brokers are moving into other related areas. So Schwab now has its own index funds, some at a zero TER. They will make money on the stock lending side. They are all seeking to develop their advisory side. They can still charge fees for retirement accounts. Some offer credit cards. And so on.

But it is tough. Trading is now a commodity that operates at a cost that approaches zero. Will we see that in the UK and, if so, what will that mean?

Vanguard: huge company with $8 trillion AUM sounds reassuring. Vanguard: struggling to make ends meet less so. Perhaps I should keep my account < £1 million. If one of the big funds failed, that would be a big problem.

[BT63]

Vanguard: huge company with $8 trillion AUM sounds reassuring. Vanguard: struggling to make ends meet less so. Perhaps I should keep my account < £1 million. If one of the big funds failed, that would be a big problem.

I intend to keep my accounts below the £85k compensation scheme limit.
It means I need several accounts and that I will pay around 0.2% p.a. more than if I put it all with the cheapest, but it makes me feel happier that I perceive my stock market investments are less likely to be wiped out by a single severe and unexpected event.

[Lootman]

Vanguard: huge company with $8 trillion AUM sounds reassuring. Vanguard: struggling to make ends meet less so. Perhaps I should keep my account < £1 million. If one of the big funds failed, that would be a big problem.

I intend to keep my accounts below the £85k compensation scheme limit.

It means I need several accounts and that I will pay around 0.2% p.a. more than if I put it all with the cheapest, but it makes me feel happier that I perceive my stock market investments are less likely to be wiped out by a single severe and unexpected event.

That is really only practicable if your total invested amount is modest. I suspect that there are a good few Lemons with 7 figures invested and for them to adopt your solution would require at least a dozen accounts!

[kempiejon]

I intend to keep my accounts below the £85k compensation scheme limit.
It means I need several accounts and that I will pay around 0.2% p.a. more than if I put it all with the cheapest, but it makes me feel happier that I perceive my stock market investments are less likely to be wiped out by a single severe and unexpected event.

I've a few SIPPs and ISAs spread around a few advisors, I Like bigger UK names, this is to protect me from institutional failure or problems, I have exceeded the £85k max though. Its protection from admin rather than failure, hopefully my institutions are OK I doubt/hope Halifax or AJB won't go bust but high street names are hacked or suffer some other issue that ties up funds. So it's for admin rather than absolute protection. I'm not sure the £85k is relevant as Lootman said and if your investments reach a certain size there mightn't be enough providers!

[GeoffF100]

. One is that that it is not unethical for Vanguard to sell active funds or advice, for example. The other is that you do not care.

Your second sentence sums it up.

I do care about a company's ethical standards. If it treats others badly, I fear that it would do the same to me. I will not do business with garages that recommend unnecessary work, for example. I expect that Lootman is right, and Vanguard is the most ethical of the fund managers. I think much of John Bogle's idealism lives on, even if it has been watered down a little in places.

[GeoffF100]

Vanguard: huge company with $8 trillion AUM sounds reassuring. Vanguard: struggling to make ends meet less so. Perhaps I should keep my account < £1 million. If one of the big funds failed, that would be a big problem.

I intend to keep my accounts below the £85k compensation scheme limit.

It means I need several accounts and that I will pay around 0.2% p.a. more than if I put it all with the cheapest, but it makes me feel happier that I perceive my stock market investments are less likely to be wiped out by a single severe and unexpected event.

That is really only practicable if your total invested amount is modest. I suspect that there are a good few Lemons with 7 figures invested and for them to adopt your solution would require at least a dozen accounts!

If you are well into 7 figures, you have to get practical about the risks. Most people with large sums go to a Financial Adviser and have all their money invested on one platform. As long as the platform is regulated and he hands over an FSCS sheet, I doubt whether you would be successful in suing him for negligence if the platform goes bust.

[BT63]

That is really only practicable if your total invested amount is modest. I suspect that there are a good few Lemons with 7 figures invested and for them to adopt your solution would require at least a dozen accounts!

I would hope most investors with £1m+ would have a broader range than just stockmarket-based investments on platforms such as Vanguard.

I hold only about a quarter of assets on platforms (Aviva, Fidelity, HSBC, M&G in my case).

The income portion of my investments - half of portfolio - is certificated partly so I don't have to worry about counterparty, partly so I receive the dividends immediately when they are paid and partly due to extremely low turnover not justifying paying ~0.4% p.a. account fee.

A further quarter of my investments are in precious metals which aren't held on platforms.

[GeoffF100]

That is really only practicable if your total invested amount is modest. I suspect that there are a good few Lemons with 7 figures invested and for them to adopt your solution would require at least a dozen accounts!

I would hope most investors with £1m+ would have a broader range than just stockmarket-based investments on platforms such as Vanguard.

I hold only about a quarter of assets on platforms (Aviva, Fidelity, HSBC, M&G in my case).

The income portion of my investments - half of portfolio - is certificated partly so I don't have to worry about counterparty, partly so I receive the dividends immediately when they are paid and partly due to extremely low turnover not justifying paying ~0.4% p.a. account fee.

A further quarter of my investments are in precious metals which aren't held on platforms.

£1m is not much nowadays. It does not give access to a wider range of investments. I have got a third of my portfolio in a dozen savings accounts. That would not be practicable if my portfolio was much larger. You can only use certificates for Crest registered shares That is no use if you want international diversification. Vanguard thinks that gold is a bad idea. Given the current trend, I expect that they will nonetheless offer it if there is sufficient demand. That will no doubt lead to more shaking of heads by the purists.

[absolutezero]

Vanguard: huge company with $8 trillion AUM sounds reassuring. Vanguard: struggling to make ends meet less so. Perhaps I should keep my account < £1 million. If one of the big funds failed, that would be a big problem.

I suspect if one of the big funds ever failed then you would have more to worry about than losing some money....