Everywhere you look at Vanguard headquarters, the nation’s second-largest money manager, you see memorials to underdogs who won improbable victories. Vanguard’s verdant office park sits close to the historic Valley Forge site in Pennsylvania, where George Washington turned a disparate group of colonists into a force that would win American independence from the better-equipped British army.
Many of the office buildings are named after daring British ships that defeated larger enemies in the 18th and 19th centuries. Front and center is a statue of Vanguard’s founder, the late Jack Bogle, who is credited with leading a financial revolution by popularizing index funds and driving down investing costs to effectively transfer billions of dollars from Wall Street to Main Street investors.
In its 48-year history, Vanguard deployed its squeaky-clean reputation and rock-bottom money management fees to attract more than one out of every four dollars invested in funds — approximately $7.6 trillion — blowing past longer-established fund companies. Even last year, as investors pulled a combined $370 billion out of funds overall, Vanguard bucked the trend and netted nearly $83 billion in inflows, according to data from fund-tracker Morningstar. Only BlackRock notched more net gains.
Now, the competitive landscape is changing, and Vanguard may once again be in the role of underdog. A growing number of competitors are taking aim directly at its bread-and-butter business by undercutting Vanguard’s fees. Some have even eliminated their fees altogether. With little room left to maneuver on fund-management fees, Vanguard is pivoting to compete on terrain it has long struggled with: providing more and better low-cost customer services, particularly in the realm of investment advice.
Vanguard executives say they are confident they are embarking on another financial revolution—one that could dwarf the impact of their low fees. “We democratized the fund business. And now there’s a huge opportunity in financial advice. We can provide better client outcomes by driving down the price of valuable advice,” says Joel Dickson, who oversees advice methodology for all of Vanguard.
Some analysts and longtime customers worry that Vanguard may have trouble winning this next round, however. It has focused so much on fund management and cost-cutting, it has long underinvested in the kinds of technology and customer service systems needed to serve 21st century investors. Vanguard customers have complained about slow, inconvenient service and clunky technology for years. Alec Lucas, Morningstar’s lead Vanguard analyst, calls the firm the “Aldi” of money managers, likening it to the discount grocery chain that is beloved by bargain shoppers but offers bare-bones service.
The experience of one prominent Vanguard customer illustrates what the firm is up against. “I love Vanguard’s index funds. I am a ‘Boglehead.’ I am their biggest fan. But they are a victim of their own success,” says Rob Berger, a retired attorney and author of Retire Before Mom & Dad. Berger used to hold almost all his money at Vanguard.
Recently he moved about two-thirds of his savings to another brokerage because it offered more-responsive phone service and more-robust apps and web services. Though he holds some Vanguard funds in the new account, he has also invested in the new firm’s low-cost funds. “Vanguard has to get their act together,” he says.
A look back at Vanguard
At the outset, Vanguard took some daring and, in retrospect, wildly successful risks — on an unusual corporate structure, a new kind of investment, and a profit-slashing price war. Perhaps the most important yet least appreciated of these decisions was to structure Vanguard as a mutual company. That means it is owned not by stockholders or an individual, but is investor-owned, meaning fund shareholders own the funds, which in turn own the parent company.
Bogle argued this freed Vanguard from the conflicts of interest that plagued its competitors, who were expected to return big profits to their owners, often at the expense of their customers. It also enabled Vanguard to avoid the bubbles and scandals that have made many investors cynical about Wall Street.
Bogle’s 1976 launching of the first retail index fund got much more attention. The Vanguard 500 simply passively tracked the S&P 500 index. Every other retail mutual fund at that time was run by a professional manager who chose stocks for the fund, trying to beat the market. Competitors criticized the index fund as “un-American.” Today, index funds hold a majority of fund assets.
The Vanguard effect
Vanguard’s third crucial strategy was sparking a fund-management-fee price war. Fund sponsors generally make their money by deducting expenses from investors’ portfolios (calculated as a percentage of assets, known as the expense ratio). When Vanguard launched in 1975, the average fund subtracted about three-fourths of a percentage point from an investor’s portfolio annually. Because it didn’t have to worry about funneling customer cash to owners, Vanguard chipped away at its expense ratio so that today its investors pay an average fee of just 0.08%, or a 12th of a penny for every dollar invested.
What’s more, Vanguard raises the returns on its funds with the interest it earns on lending securities to other brokerages or short sellers. For example, the fees from securities borrowers added 0.02% to the return of its Total Stock Market Index Fund, offsetting most of that fund’s 0.03% expense ratio.
Those strategies have forced competitors to offer better deals to their customers, says Morningstar’s Lucas. “The Vanguard Effect is real,” he says. Vanguard customers collectively get to keep at least $26 billion a year more than they would if the company charged the industry’s average expense ratio of 0.47%, Lucas calculates.
Despite its bold history, Vanguard is extremely cautious in many other aspects of its operations. That has helped the company build a stable of top-notch funds and saved it from some fiascos — but it has also meant sometimes playing catch-up as the investment market has evolved. Vanguard has been slow to add new funds, for example. Dan Reyes, who heads Vanguard’s portfolio review department, says his team takes months, and often years, to study the advisability of a potential new fund. “We have a pretty high hurdle. We are looking for a product that will meet investors’ needs for a decade,” he says.
That high hurdle has helped Vanguard avoid risky niche offerings, such as leveraged funds, which use debt and derivatives to amplify gains (and losses, too). And it has ensured that the firm remains extremely picky about the fund managers it hires. Many of Vanguard’s actively managed funds are run by subadvisers, such as Wellington Management, Primecap Management and Britain’s Baillie Gifford. Of the 50 Vanguard active funds rated by Morningstar, 48 are “medalists,” rated Gold, Silver or Bronze. “No one comes close to Vanguard” for affordable, well-managed active funds, says Jeff DeMaso, editor of The Independent Vanguard Adviser newsletter.
An overabundance of caution has sometimes made Vanguard slow to adapt to important investing trends. In 1996, it dismissed a proposal to launch a new kind of investment called an exchange-traded fund. It wasn’t until 2001, when competitors’ ETFs had proved their staying power, that Vanguard joined in. It didn’t join the robo-adviser niche, which was launched by competitors in 2008, until 2020.
And the firm meant to empower mom-and-pop investors has stinted on customer service. In his books, Bogle, who passed away in 2019, acknowledged that customers had complained about poor service for years. Until recently, for example, Vanguard’s solution to a rush of phone calls wasn’t to hire more customer service representatives but to dragoon all employees into a “Swiss Army” of call answerers.
But that penny-pinching has sparked widespread complaints. Bogleheads.org, an independent site where Bogle fans swap ideas, features a thread on Vanguard customer service with more than 1,000 comments. Not all are negative, but there are some common complaints: Vanguard hasn’t followed Schwab and Fidelity in offering night and weekend phone service; when phone lines are open, callers can spend hours on hold; and it can take weeks of back-and-forth to accomplish simple tasks, such as transferring money.
Berger, the avowed Boglehead, whose YouTube videos on investing get tens of thousands of views, documented his effort to start a Vanguard robo-adviser account in the spring of 2022. He said it took 10 days for Vanguard to register his $3,000 deposit, and then he reported that the website wouldn’t load correctly, failing to show his progress toward savings goals.
In a podcast interview conducted earlier this year by Barry Ritholtz, chief investment officer of Ritholtz Wealth Management, Vanguard CEO Mortimer “Tim” Buckley acknowledged that internal gauges in previous years showed customer satisfaction “declining because of an antiquated digital experience.”
Better customer relations
So, Vanguard has been racing to improve its customer service. The company launched a new mobile phone app in 2022 — to blistering reviews. “Our clients hated the mobile app,” Buckley said in his interview with Ritholtz. The tech team kept tinkering with it, issuing 200 updates in nine months, he said. Morningstar’s Lucas says Vanguard is about two-thirds of the way through a massive technology upgrade aimed at improving customers’ online experience.
As a result of efforts to improve interactions with individual investors, “from redesigned web and mobile experiences to additional investments in our client-facing call functions,” says a Vanguard spokesperson, internal research and customer feedback surveys show a 30% increase in client satisfaction with the website and a 10% improvement in services such as hold times or how long it takes to get to the right person.
And the fund company is full steam ahead on its evolution into a more diversified financial services firm. Vanguard is rapidly upgrading its advice business in the belief that providing financial planning and coaching can have profound impacts on clients’ long-term financial security, says Vanguard’s Dickson. The firm’s Personal Advisor service charges 0.3% of assets for access to human advisers. Customers need a minimum balance of $50,000. Those with at least $500,000 get a personal certified financial planner. The firm’s robo-adviser service, Digital Advisor, charges 0.15% and requires a minimum investment of just $3,000. Both advisory fees are on top of fund expenses.
Each of the advisory services starts with a basic portfolio of four index funds, providing exposure to U.S. and international stocks and bonds. Vanguard is adding more options, such as actively managed funds and funds that stress environmental, social or governance issues. To make its advisory services more attractive, Vanguard has started offering those customers exclusive access to specially curated versions of some of its best active funds. Advisory clients can also get into some popular funds that are otherwise closed to new investors.
Vanguard also now offers automatic tax-loss-harvesting in both of its advice options. And other services will be coming soon. Brian Concannon, head of Vanguard Digital Advisor, says the company expects to roll out additional services this year to help retirees calculate and automate tax-efficient withdrawals from their retirement accounts.
Looking to the future
Vanguard is facing a tricky challenge of defending its core business while also racing to catch up with consumers’ evolving expectations. But it’s far from on the ropes. Morningstar last year called Vanguard’s advice programs the best overall in the industry because of their low costs, services such as goal-planning tools, and portfolio construction. Kiplinger readers gave Vanguard “above average” ratings for its customer service and advice programs this spring. Vanguard also ranked at the top for do-it-yourself investors in a recent J.D. Power survey.
And the core business? As Vanguard approaches its 50th birthday and prepares for the next 50 years, CEO Buckley has vowed to keep paring fund-management fees. If the net positive inflows so far this year are any indication, the business of managing investors’ money through mutual funds and ETFs for now appears to be beating back the competition.
Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
Kim Clark is a veteran financial journalist who has worked at Fortune, U.S News & World Report and Money magazines. She was part of a team that won a Gerald Loeb award for coverage of elder finances, and she won the Education Writers Association's top magazine investigative prize for exposing insurance agents who used false claims about college financial aid to sell policies. As a Kiplinger Fellow at Ohio State University, she studied delivery of digital news and information. Most recently, she worked as a deputy director of the Education Writers Association, leading the training of higher education journalists around the country. She is also a prize-winning gardener, and in her spare time, picks up litter.
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