Mind on Money: Vanguard at a crossroads

All junkies have our favorite brands in bikes, skis, ATVs, shoes and clothing. Sometimes we hassle each other over the wrongness of the other guy’s choices; most often, however, the conversations are informational and helpful in finding new products to improve the outdoor experience. In my experience, the technology and quality in gear is directly correlated to my performance on the trail or mountain. Bottom line, gear matters, and the gear world is always changing.

Unfortunately, all my fellow gear junkies also have their stories of the “sell out.” The sell out is a gear company that had an exclusive or dominant position in their space in the market, building unique, high-quality clothing or equipment, that was then sucked up by a private equity firm or large competitor.

The buyer then kept, and sometimes expanded, the brand but changed the products, sometimes subtly, sometimes substantially, typically either to reduce costs or expand production. The result was same brand, dramatically different product experience. I can think of two high profile clothing companies, a bike company and a shoe company right off the bat, that fit the sell out bill. Sell outs make gear junkies sad and sometimes angry.

Of course, corporations change products and strategies all the time, and this certainly isn’t limited to outdoor gear. One such transformation may be going on right now with one of the highest profile companies in the financial services industry. The company is Vanguard.

I have appreciated Vanguard’s values and philosophy for decades. I was a fan of their founder, John Bogle, who presented his viewpoint on low-cost index funds in a folksy, easy to grasp way, educating a whole generation of investors on the fund industry and investment concepts in general.

I have also appreciated Vanguard’s ownership structure. Vanguard is owned by its mutual funds, which are in turn owned by fund investors. With no outside shareholders, Vanguard almost functions as a sort of investment co-op, where profits are ultimately returned to fund investors in the form of lower fund expenses. While not a non-profit, Vanguard does ultimately exist to benefit the people who choose to invest in its funds.

As an advisor I also appreciate Vanguard products, which I have always considered to be “clean.” Clean in that the internal pricing was fair and easy to understand, and as a manager of money I knew what I was getting when investing client money in a Vanguard product. Vanguard in my opinion does what it does (low-cost index funds) well, and serves an important role in financial services.

Which is why I am concerned about some of the changes I’ve perceived recently at this company. As index fund investing has become more dominant, especially inside 401(k) plans, there has been a race to the bottom on fund expenses. This competitive pressure appears to have affected Vanguard’s already tiny margins and sent management searching for other revenue streams. This search has led to behavior which has in turn impacted Vanguard’s brand.

In the podcast world where I get some of my news, it’s not unusual to hear reference to “Blackrock and Vanguard,” as if these two financial industry giants were bent on taking over the world from behind the scenes. I hear people say these goliaths are buying up residential housing so they can rent it back to former homeowners, and taking over corporations through ESG board bullying, by voting the shares owned in their index funds. I personally am not aware of these behaviors when it comes to Vanguard, and it makes me sad to hear the brand referred to in these ways.

What I am aware of is my mutual clients coming in saying Vanguard is tormenting them through the implementation of new account service fees, the consolidation of product lines and in other subtle ways. These things to me make it sound like in trying to keep up in the race to the bottom with fund expenses, Vanguard may have put its brand at risk, and to me this is a shame.

I’ve heard it said when it comes to social media, “if there is no cost to the product, then you are the product,” well I believe this can ring true in financial services as well. Yes, some index fund providers have removed fees from their funds, but are we naive enough at this point to believe this means the product is free? Would it really matter to the typical index fund investor if fees in the fund are .03% vs .05%? I would prefer the fund family charge a fee that enables it to continue providing the product. I would prefer honesty and transparency.

Soon a new CEO will take the helm at Vanguard. It will be the first external CEO the company has ever hired. The new CEO is from Blackrock. I feel like this institution stands at a crossroads, and I hope that it will choose to continue fulfilling the important role in financial services it has played for many decades. Only time will tell.