I’ve been a Vanguard buyer (ahem, proprietor) for 23 years now. As such, I’ve additionally been a kind of long-time prospects that has been disenchanted to see their struggles with customer support for his or her particular person retail brokerage shoppers. One among my massive choices in 2024 was if I’d transfer the vast majority of my belongings to Constancy or Schwab. Right here’s one other long-winded publish about my ideas about Vanguard.
Jack Bogle made a strong choice when he created the Vanguard possession construction. Every of the mutual funds was its personal entity, and the shareholders personal the funds. In flip, the member funds personal the umbrella Vanguard Group. The member funds every pay their very own bills for analysis, administration, and many others. Every thing is “at-cost”. There aren’t any exterior shareholders which will name for income to place apart or dividends to be paid out to them. In idea, because of this the targets of every particular person retail investor are aligned with the Vanguard executives.
Nonetheless, in observe, we’re completely passive shareholders in that now we have no vote over who’s CEO, who’s on the Board of Director, how a lot every of these people will get paid (we don’t even get to see the precise quantity), whether or not the corporate ought to prioritize customer support or progress of belongings or worker advantages. As with many giant non-profits, the executives at Vanguard get very giant compensation packages and the goal is sort of all the time progress, progress, progress. Greater is best; extra belongings means the executives can justify a bigger paycheck.
After I began with Vanguard, they have been a lot smaller and there was extra “fats” within the system. Their expense ratio for the flagship S&P 500 index fund one thing like 0.20% yearly ($20 a yr for each $10,000 invested). ETFs didn’t exist, and mutual funds normally charged customers a transaction charge until they have been on a “mutual fund grocery store” with a pay-to-play construction. In flip, this made mutual funds dearer as a result of they handed the prices onto the client. Vanguard refused to pay kickbacks as a result of that may improve the prices to shareholders, so us retail traders needed to go “direct” to Vanguard to get entry with no transaction charges. The most cost effective choice was to go direct with Vanguard, and so they had a “low-cost and cheerful” status. They weren’t the perfect in customer support, however telephone calls have been answered promptly.
Then got here the exchange-traded fund (ETF). ETFs have been cheaper to keep up for Vanguard (and everybody else). This drove prices even decrease. ETFs could possibly be purchased and bought at any brokerage with the identical transaction prices as a inventory. ETFs additionally had inherent tax-advantages that made it a lot simpler to keep away from creating capital features distributions. I imagine a giant break occurred when Vanguard stopped holding the mutual fund and ETF expense ratios at the very same degree. Everybody was incentivized additional to carry the ETF model.
At the moment, the expense ratio for the flagship S&P 500 index mutual fund is simply 0.04% yearly ($4 a yr for each $10,000 invested). However the ETF model is simply 0.03% yearly ($3 a yr for each $10,000 invested). There are each definitely less expensive than 20 years in the past, however immediately every of their ETFs additionally has a minimum of two different rivals on the identical low expense ratio. Vanguard in all probability feels pressured to maintain their ETF prices as little as doable, lest they harm their “low-cost” model.
Nonetheless, since every Vanguard fund has to pay for its personal bills together with customer support prices, Vanguard is now incentivized to have you ever maintain your ETF at one other brokerage. (And when you begin holding Vanguard ETFs in one other brokerage, technically you have to be rooting for decrease prices and thus Vanguard to spend much less on customer support as properly.) Trades are zero now in all places. However each single customer support name nonetheless must be paid for by some means, and from this angle, you may start to grasp why their customer support has gone downhill. Their margins are purposefully skinny and the one options are to both increase their expense ratios a tiny bit (slower progress and maybe decrease govt salaries) or simply attempt to hold spending as little as doable on customer support.
Guess which one they picked? From WSJ article (reward) Vanguard’s Die-Laborious Clients Have a Message for New CEO: ‘The Service Is Abysmal’:
Brokerage-account prospects have been additionally not too long ago warned that “extreme reliance on telephone associates” may result in further charges or account termination.
Importantly, Vanguard has restricted methods to subsidize the low prices of their ETFs. In the meantime, Constancy nonetheless makes a ton of cash upselling prospects to quite a lot of wealth administration providers. Schwab earns a whole lot of tens of millions further by quietly paying practically zero curiosity on their money sweep (they not too long ago dropped it to 0.05% APY in December 2024), pocketing a median of two% to three% yearly on their buyer’s idle money. Robinhood lets me commerce random crypto 24/7 and promotes energetic buying and selling which leads to an insane quantity of fee for order stream.
Is that this the pure finish for Vanguard? Will they only make the commodity product and let others distribute it and cope with prospects?
That is why the brand new CEO will undoubtedly have a giant give attention to low-cost wealth administration. It will permit them to cost prospects the next charge for elevated monetary recommendation and customer support. They’d lastly have one thing to upsell. The one different various is for them to lift Vanguard brokerage charges in order that the retail prospects pay instantly for the extra providers they require.
Ultimately, I requested myself, “If one thing occurs to me, would I slightly have my spouse cope with Vanguard, Constancy, or Schwab?” She could find yourself desirous to pay for further help and recommendation. Vanguard would have the worst customer support, however maybe they’ll provide you with a reasonable-cost advisory system. Constancy and Schwab would undoubtedly be glad to supply her further monetary recommendation as properly, probably at the next worth. Constancy has stable customer support in my view, however I don’t actually like their wealth administration choices based mostly on my previous experiences serving to older family members. Schwab has a conveniently-located bodily department close to us, however I’ve a foul style in my mouth after their “Clever Portfolios” zero-interest-cash-is-good-for-you fiasco. (See CBNC article Charles Schwab to pay $187 million to settle SEC fees that it misled robo-advisor shoppers on charges.)
Ultimately, I’ve punted my choice and solely made some smaller strikes. I transferred our Vanguard IRA belongings over to Robinhood as a 5-year check run (in change for $16,000). I have already got my Solo 401k and an energetic Money Administration Account at Constancy. Maybe Vanguard will shore up their customer support to “respectable sufficient” and use AI to create a at-cost/low-cost advisory platform for the lots. Maybe the Constancy mannequin of stable customer support plus an entire bunch of each low-cost and higher-cost menu gadgets is the perfect one. Maybe I’ll place the very best worth on a neighborhood Schwab human rep.
Picture credit score: Canva AI generated with immediate “HMS Vanguard in tough seas”
