Special Set-Up
Vanguard’s success can be traced to decisions made by Bogle, who created a company with two distinct characteristics: it is owned by its own investors and the cost savings that accompany growth are returned to customers through reduced fees. The firm’s average asset-weighted fund fee has dropped to 12 basis points, or 12 cents per $100, from 68 basis points in 1975.
“They were lowering fees when no one else was,” said Eric Balchunas, an analyst with Bloomberg Intelligence. “That builds a connection that is hard to break.”
Bogle, at 88, remains part of the appeal, even though he retired as chief executive officer in 1996. He shows up regularly in print and on television, making the case for Vanguard’s methodical approach. The Bogleheads, a group espousing Bogle’s principles, claims 50,000 registered members on its website.
Fee-based financial advisers polled this year by Cogent Reports, a Cambridge, Massachusetts-based research firm, said they would recommend Vanguard’s ETFs and mutual funds more than those of any rival.
“Vanguard is one of the only financial-service firms with true brand loyalty,” said Dave Nadig, CEO of research firm ETF.com.
Price War
Still, Vanguard’s main indexing rivals all lowered fund prices last year, in some cases undercutting the leader. Schwab’s U.S. Broad Market ETF charges three basis points, as does BlackRock’s Core S&P Total U.S. Stock Market ETF. The Vanguard Total Stock Market ETF charges four.
BlackRock’s moves have made the biggest impact. Investors plowed $60 billion into BlackRock’s low-cost “core” series of ETFs in the first half of 2017, not far behind the $77 billion that went into all Vanguard ETFs, according to data compiled by Bloomberg.
Lawrence Glazer, a Boston adviser with Mayflower Advisors, says BlackRock has courted firms like his by selling both ETFs and access to expensive technology.
“Cheapness only goes so far,” said Glazer, whose firm oversees $2.5 billion. “BlackRock is trying to build a sticky relationship with the adviser community.”
Vanguard may have given its peers an opening last year when its service stumbled. The Philadelphia Inquirer and Wiener’s newsletter documented a rise in customer complaints such as accounting errors and longer wait times on phone calls, suggesting that the firm may be having trouble keeping up with its robust growth.
Vanguard responded by hiring 1,600 people last year, many in customer-related roles. Service was “periodically challenged” in 2016, said spokesman John Woerth, “but we swarmed the issue, bringing people and technology to bear.”
Vanguard’s McIsaac says the firm isn’t taking its success for granted. It’s stepping up efforts in technology and investor education and expanding its unit offering low-cost advice.
“If we do right by the people who choose to invest with us, we will do well in the marketplace,” he said.
This article was provided by Bloomberg News.