Vanguard's business structure

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bertilak
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Vanguard's business structure

Post by bertilak »

I see many posts here at bogleheads.org making the case that Vanguard, by streamlining customer services and support, will reduce costs and therefore reduce fund expense ratios.

My understanding of Vanguard's structure is incomplete and may even be drastically wrong, but ...

If the brokerage business (analogy: store) is separate from the mutual fund business (analogy: manufacturer), will reducing the expenses of the brokerage (store) actually have any effect on the expenses of the funds (manufacturer)?

As an owner of a Vanguard fund I hear that I am an indirect owner of Vanguard itself, but am I really when it comes to their brokerage business, the part of Vanguard I actually deal with?
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jdamo
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Re: Vanguard's business structure

Post by jdamo »

Good questions!
Would it be good to call Vanguard and just ask them directly?
happychineseboy
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Re: Vanguard's business structure

Post by happychineseboy »

I always assumed brokerage expenses were just another fund management/administrative fee

I always assumed any sort of cost cutting made by Vanguard would be reflected by lower admin fees charged to their customers
RickyAZ
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Re: Vanguard's business structure

Post by RickyAZ »

The funds own the operations which consists of brokerage and mutual funds. They are separate “businesses” legally and operate under different regulations but collectively make up Vanguard. Most associates work both sides of the business
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bertilak
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Re: Vanguard's business structure

Post by bertilak »

RickyAZ wrote: Mon Aug 02, 2021 11:15 am The funds own the operations which consists of brokerage and mutual funds. They are separate “businesses” legally and operate under different regulations but collectively make up Vanguard. Most associates work both sides of the business
So, it is legitimate to say that saving expenses anywhere in Vanguard is a benefit to the funds themselves. Are the benefits cap-weighted in some way?

Another related question: If PAS is a money-maker, does that result in lower ERs of Vanguard funds in general?
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galawdawg
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Re: Vanguard's business structure

Post by galawdawg »

happychineseboy wrote: Mon Aug 02, 2021 11:02 am I always assumed brokerage expenses were just another fund management/administrative fee

I always assumed any sort of cost cutting made by Vanguard would be reflected by lower admin fees charged to their customers
Expenses of the brokerage (The Vanguard Group) are paid for by the expense ratios of the various Vanguard funds.

Cost-cutting may be reflected in lower expense ratios IF management of The Vanguard Group elects to pass them back to the funds, or reduce the amount charged to the funds. On the other hand, they may, as they have been doing consistently since Jack Bogle left, merely increase the compensation paid to executives and upper management. Or they could do both, increase the compensation (partnership profits) to executives and other management and throw the remaining crumbs to us, the 'client-owners."

The problem is that despite us being the "owners" we are not permitted to know any of that information. Despite Vanguard's talk about the importance of transparency (particularly concerning executive compensation) in the companies whose shares are held by the funds, Vanguard doesn't practice what it preaches. It is perhaps the least accountable and least transparent brokerage out there, mutual structure notwithstanding. We get no vote or input on the leadership or management of the company we "own" and we get no information on how the money is spent.

As far as PAS, while it is impossible to say for certain (again, Vanguard won't disclose this information even to us "client-owners") reports are that profits from VPAS are retained by the Vanguard Group and paid out to Vanguard executives and other employees and not returned to the funds or us, the fund owners.
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