Max Beer on Vanguard

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Gaston
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Max Beer on Vanguard

Post by Gaston »

Was listening to the 20 October 2022 episode of the Excess Returns podcast and liked this quote from the guest, Andrew Beer: "The asset management industry is an extraordinarily unusual industry in that we have Vanguard. There is no major industry out there where one of the market leaders in a non-profit. They price everything at zero. And it they could charge less than zero, they would. Imagine if Microsoft decided to give back all their profits tomorrow."

The above, in turn, reminded me of a statement made by Gus Sauter, the former Chief Investment Manager at Vanguard. According to Mr. Sauter, Jack Bogle's greatest contribution to the retail investor, perhaps even greater than introducing the first retail index fund, was setting up Vanguard as a non-profit.

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Re: Max Beer on Vanguard

Post by alex_686 »

A problem. Vanguard is registered as a for profit company.

As a hint, non-profits have to make some public filings, such as compensation for its top people. Vanguard doesn’t.

The SEC has slapped down Vanguard for some of its marketing claims in this area.

Now I will grant that Vanguard has a unique structure. It might even be beneficial. But you way overstate your case.
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Re: Max Beer on Vanguard

Post by Cheez-It Guy »

Some of their recent cost-cutting efforts seem less than popular on this forum.
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Re: Max Beer on Vanguard

Post by billaster »

It would be more accurate to say that Vanguard is a for-profit corporation in which all of the profits accrue to the funds, not external shareholders.
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Re: Max Beer on Vanguard

Post by beyou »

Seems more accurate to say Vanguard is similar to the historic mutual insurance companies.
They were for-profit but gave/still give dividends to policyholders who are also owners.
Our dividends come in the form of lower ER/higher returns, at Vanguard.
And by owners, they mean FUND owners, hence you get same benefit whether you hold those funds at Vanguard Brokerage or another brokerage.
Opening an account at Vanguard Brokerage does not make you a mutual owner, that is a traditional client vendor relationship.
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Re: Max Beer on Vanguard

Post by arcticpineapplecorp. »

it's a mutual mutual fund company. there are mutual insurance companies. you can listen to some discussion on mutualization in the Princeton conference with Jack Bogle and many other giants in the field. Burton Malkiel gives some thoughts on how insurance companies that were mutualized profited: https://mediacentral.princeton.edu/medi ... 1_rutvhinh
(start at 1:01:31)

And on a final note, I've never heard of Max Beer, but I've heard of Bogle wine.
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Re: Max Beer on Vanguard

Post by alex_686 »

arcticpineapplecorp. wrote: Tue Jun 06, 2023 8:59 pm it's a mutual mutual fund company. there are mutual insurance companies.
Specifically not this. I have worked at both mutual insurance and fraternal fund sponsors. There are regulations and reporting that they must meet. Vanguard does not. The SEC slapped down Vanguard when it tried to market itself as a “mutual mutual”.
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Re: Max Beer on Vanguard

Post by arcticpineapplecorp. »

alex_686 wrote: Tue Jun 06, 2023 9:15 pm
arcticpineapplecorp. wrote: Tue Jun 06, 2023 8:59 pm it's a mutual mutual fund company. there are mutual insurance companies.
Specifically not this. I have worked at both mutual insurance and fraternal fund sponsors. There are regulations and reporting that they must meet. Vanguard does not. The SEC slapped down Vanguard when it tried to market itself as a “mutual mutual”.
What is it then? You do agree the company is owned by the mutual funds, right?
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Re: Max Beer on Vanguard

Post by nisiprius »

Vanguard isn't a nonprofit. That's a simple matter of objective fact, quickly verifiable at the Pennsylvania Department of State:

Image

I always disliked the rhetoric they used to use, which never actually said Vanguard was a nonprofit, but, I thought, gave the misleading impression that it was. The fact that Andrew Beer thinks Vanguard is a nonprofit shows that some people have, in fact, been misled.
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Re: Max Beer on Vanguard

Post by Elric »

As others have already posted, Vanguard is a for-profit corporation.

"Imagine if Microsoft decided to give back all their profits tomorrow." Just wait until Max Beer learns that the largest 500 supercomputers, the majority of large web servers, many smart thermostats and other IoT devices, and most smart phones have, at their core, a free operating system (Linux) that no for-profit owns.

And that arguably the most popular programming language in the world (Python) is also available for free and not owned by any for-profit.
Last edited by Elric on Wed Jun 07, 2023 11:58 am, edited 1 time in total.
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Re: Max Beer on Vanguard

Post by billaster »

Both Fidelity and Vanguard are private for-profit corporations. As private corporations, they are not subject to the SEC financial disclosures that public corporations are required to file. The compensation for the CEOs and other executives of neither Fidelity nor Vanguard are public information.

The major difference is that the shareholders and owners of Fidelity are Abigail Johnson, her family and a relative handful of insiders. The shareholders and owners of the Vanguard Group are the trusts containing the mutual funds.

In both cases, profits go to the shareholders. For Fidelity that is the Johnson family. For Vanguard, it is the mutual funds and since there are no external shareholders, no where else for profits to go.
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Re: Max Beer on Vanguard

Post by typical.investor »

Gaston wrote: Tue Jun 06, 2023 8:36 pm They price everything at zero.
What evidence is there that the PAS (personal advisory services) are priced at cost? I don't believe there is anything in their structure that requires it, nor that Vanguard investors own PAS.

I suspect rather that PAS profits are paid out as employee bonuses.

And also that lowering costs (as in cutting customer support services) results not only in employee bonuses but also makes their level of PAS service more attractive.
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Re: Max Beer on Vanguard

Post by typical.investor »

billaster wrote: Tue Jun 06, 2023 10:25 pm In both cases, profits go to the shareholders. For Fidelity that is the Johnson family. For Vanguard, it is the mutual funds and since there are no external shareholders, no where else for profits to go.
So you assert that profits generated by Vanguard Advisers, Inc., and the Vanguard National Trust Company reduce fund expenses.

I don't believe there is any requirement for those service to be offered at cost. And I don't believe there is anything stopping Vanguard from paying those profits out as employee bonuses. Of course, they won't be called profits but rather an expense (employee compensation).

What real evidence do you have that Vanguard Advisers, Inc., and Vanguard National Trust Company profits reduce fund expenses?
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Re: Max Beer on Vanguard

Post by billaster »

typical.investor wrote: Tue Jun 06, 2023 11:42 pm
billaster wrote: Tue Jun 06, 2023 10:25 pm In both cases, profits go to the shareholders. For Fidelity that is the Johnson family. For Vanguard, it is the mutual funds and since there are no external shareholders, no where else for profits to go.
So you assert that profits generated by Vanguard Advisers, Inc., and the Vanguard National Trust Company reduce fund expenses.

I don't believe there is any requirement for those service to be offered at cost. And I don't believe there is anything stopping Vanguard from paying those profits out as employee bonuses. Of course, they won't be called profits but rather an expense (employee compensation).

What real evidence do you have that Vanguard Advisers, Inc., and Vanguard National Trust Company profits reduce fund expenses?
The trustees of the funds vote the shares of the funds for the benefit of the investors. They hire the managers and approve compensation. They have a fiduciary duty to the investors. So unless you are a conspiracist who thinks that the fiduciary trustees in violation of their duties are in cahoots with the Vanguard managers to loot the funds, your premise is rather weak. Do you really think that billions of dollars could be shoveled around without anyone knowing? That not a single trustee would spill the beans?
Last edited by billaster on Wed Jun 07, 2023 12:00 am, edited 1 time in total.
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Re: Max Beer on Vanguard

Post by Northern Flicker »

billaster wrote: Tue Jun 06, 2023 10:25 pm For Vanguard, it is the mutual funds and since there are no external shareholders, no where else for profits to go.
Executive compensation and bureaucratic bloat could absorb plenty of revenue, keeping it from flowing to fund investors.
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Re: Max Beer on Vanguard

Post by billaster »

Northern Flicker wrote: Wed Jun 07, 2023 12:00 am
billaster wrote: Tue Jun 06, 2023 10:25 pm For Vanguard, it is the mutual funds and since there are no external shareholders, no where else for profits to go.
Executive compensation and bureaucratic bloat could absorb plenty of revenue, keeping it from flowing to fund investors.
Do you think it makes a significant difference to investors whether Buckley makes $10 million or $20 million a year?
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Re: Max Beer on Vanguard

Post by typical.investor »

billaster wrote: Wed Jun 07, 2023 12:06 am
Northern Flicker wrote: Wed Jun 07, 2023 12:00 am
billaster wrote: Tue Jun 06, 2023 10:25 pm For Vanguard, it is the mutual funds and since there are no external shareholders, no where else for profits to go.
Executive compensation and bureaucratic bloat could absorb plenty of revenue, keeping it from flowing to fund investors.
Do you think it makes a significant difference to investors whether Buckley makes $10 million or $20 million a year?
Are you asking me if I think it makes no difference if PAS profits are used to reduce expenses or paid out in incentives?

Or are you asking me if I think PAS profits are $10 million?

PAS should have at least $350 million or so in revenue. I suspect their profits are much higher than $10 million.
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Re: Max Beer on Vanguard

Post by typical.investor »

billaster wrote: Tue Jun 06, 2023 11:59 pm
typical.investor wrote: Tue Jun 06, 2023 11:42 pm
billaster wrote: Tue Jun 06, 2023 10:25 pm In both cases, profits go to the shareholders. For Fidelity that is the Johnson family. For Vanguard, it is the mutual funds and since there are no external shareholders, no where else for profits to go.
So you assert that profits generated by Vanguard Advisers, Inc., and the Vanguard National Trust Company reduce fund expenses.

I don't believe there is any requirement for those service to be offered at cost. And I don't believe there is anything stopping Vanguard from paying those profits out as employee bonuses. Of course, they won't be called profits but rather an expense (employee compensation).

What real evidence do you have that Vanguard Advisers, Inc., and Vanguard National Trust Company profits reduce fund expenses?
The trustees of the funds vote the shares of the funds for the benefit of the investors. They hire the managers and approve compensation. They have a fiduciary duty to the investors. So unless you are a conspiracist who thinks that the fiduciary trustees in violation of their duties are in cahoots with the Vanguard managers to loot the funds, your premise is rather weak. Do you really think that billions of dollars could be shoveled around without anyone knowing? That not a single trustee would spill the beans?
How did Vanguard get their billion dollar rainy day fund that was proportionally quite larger than Bogle ever saw the need for.

As for the fiduciary trustees, please tell me what amount they pay out in employee compensation bonuses. Is it defined? What's the limit? I don't believe they are obligated to pay zero in bonuses.

Haven't you ever seen a fiduciary put someone into a high expense fund under the rationale that it offers beneficial exposure. It's the cost of that exposure they will say. Larry Swedroe and the company he worked for did it all the time. If the trustees claim it's the cost of employee retention, then I don't see what recourse anyone has.

So no, I don't believe the trustees will direct all of the PAS profits to lower expenses. I don't even believe they are obligated or trying to.

It's not Bogle's Vanguard anymore. He was exceptional in a way that I don't see at Vanguard now.

As for voting, how often does it happen that employee compensation and where PAS profits are going to comes up? I can only remember one vote and don't think that was mentioned.
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Re: Max Beer on Vanguard

Post by tomsense76 »

Elric wrote: Tue Jun 06, 2023 10:14 pm As others have already posted, Vanguard is a for-profit corporation.
+1
Elric wrote: Tue Jun 06, 2023 10:14 pm Now just wait until Max Beer learns that the largest 500 supercomputers, the majority of large web servers, many smart thermostats and other IoT devices, and most smart phones have, at their core, a free operating system (Linux) that no for-profit owns.
Even this forum is running on open source. Wouldn't be surprised if it also runs on a Linux machine somewhere. The Linux Foundation is in fact a non-profit (like many of the organizations that shepherd in and help maintain open source)
Elric wrote: Tue Jun 06, 2023 10:14 pm And that arguably the most popular programming language in the world (Python) is also available for free and not owned by any for-profit.
It turns out writing code in a programming language that is easy to read is an advantage :wink:

Also housed under another non-profit, the Python Software Foundation.
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Re: Max Beer on Vanguard

Post by z3r0c00l »

I would argue that Amazon, P/E ratio of 306, has been a borderline non-profit for nearly 30 years. Not intentionally of course, but as a result of low prices trying to gobble up more of the market. So it is possible for a corporation to enrich investors through stock speculation without really running a conventionally successful business, as long as the mythology of someday making profits can be maintained. (2.5% profit margins right now which is quite low, but a huge improvement for them.) That a 30-year old company can be overpriced by more than 10x hints at the idea that there is more than one way to dominate a field.
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Re: Max Beer on Vanguard

Post by alex_686 »

arcticpineapplecorp. wrote: Tue Jun 06, 2023 9:39 pm
alex_686 wrote: Tue Jun 06, 2023 9:15 pm
arcticpineapplecorp. wrote: Tue Jun 06, 2023 8:59 pm it's a mutual mutual fund company. there are mutual insurance companies.
Specifically not this. I have worked at both mutual insurance and fraternal fund sponsors. There are regulations and reporting that they must meet. Vanguard does not. The SEC slapped down Vanguard when it tried to market itself as a “mutual mutual”.
What is it then? You do agree the company is owned by the mutual funds, right?
Technically yes, but it may be closer to a riddle, wrapped in a mystery, inside an enigma.

Vanguard talks the talk, but their disclosures are second rate. As such I can’t determine if they walk the walk.
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Re: Max Beer on Vanguard

Post by bondsr4me »

this thread is very interesting and thought-provoking.

Until some government agency, aka SEC, requires more in-depth reporting, questions
about VG's financial dealings will go on and on and on.
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Re: Max Beer on Vanguard

Post by nisiprius »

I assume "Max Beer" is a slip-of-the-tongue or autocorrection for "Andrew Beer?"

https://en.wikipedia.org/wiki/Max_Beer
Moses "Max" Beer (10 August 1864 – 30 April 1943) was an Austrian-born Marxist economist, journalist and historian. Beer is best remembered as an early writer on the topic of imperialism and for a series of books, published in translation in several countries, which examined the nature of class struggle throughout human history.
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Re: Max Beer on Vanguard

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There are lots of industries where some market leaders come in and drive down the profit margins to razor thin, which is virtually the same thing (think Walmart for instance)

I once had a finance professor say a “not for profit” is simple a “not for tax.” Always made me chuckle.
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Re: Max Beer on Vanguard

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arcticpineapplecorp. wrote: Tue Jun 06, 2023 8:59 pm it's a mutual mutual fund company. there are mutual insurance companies. you can listen to some discussion on mutualization in the Princeton conference with Jack Bogle and many other giants in the field. Burton Malkiel gives some thoughts on how insurance companies that were mutualized profited: https://mediacentral.princeton.edu/medi ... 1_rutvhinh
(start at 1:01:31)

And on a final note, I've never heard of Max Beer, but I've heard of Bogle wine.

If you ever get a chance...

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Re: Max Beer on Vanguard

Post by arcticpineapplecorp. »

typical.investor wrote: Wed Jun 07, 2023 1:22 am It's not Bogle's Vanguard anymore. He was exceptional in a way that I don't see at Vanguard now.
it's hard to prove a counterfactual but we don't know what Vanguard would have been if Bogle had continued running it until his death. But we can listen to what others who were close to Jack have reported. I was fascinated by some recent interviews of Charlie Ellis (I think the one that was most illuminating might have been on Ritholtz's Masters In Business) in which Charlie gave many examples of how Jack was great at starting a small business but he was not the type to have been able to (or wanted to) run a behemoth like the Vanguard of today.

For starters, Charlie told a story about how in the early days Jack was so cheap he HATED spending money on computers because he couldn't see the payoff. It was others at Vanguard that had to convince him to do so so they could grow the business and only convinced him when they explained how the technology would LOWER COSTS for the customers. With everybody complaining about how lame the Vanguard technology is today (fisher price UI design?) do you really think it would be better in the 2000s to 2019 if Jack were still running it but retained his values of not seeing the value nor wanting to invest the money in technology which he thought was a waste of money? This is just one example but Charlie made it very clear in his opinion that Jack was great at starting a small business but he wouldn't have been the best guy to run a large business. Different skill set.

So yes Jack was exceptional for what he did and what he gave the world. And maybe you're saying we need someone exceptional to run Vanguard and maybe that's not Tim Buckley (sorry Tim). I don't know.

It's not Bogle's Vanguard anymore. But it's not the small company that Jack started (and was great at running) all those years ago either.
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Re: Max Beer on Vanguard

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arcticpineapplecorp. wrote: Tue Jun 06, 2023 8:59 pm it's a mutual mutual fund company. there are mutual insurance companies. you can listen to some discussion on mutualization in the Princeton conference with Jack Bogle and many other giants in the field. Burton Malkiel gives some thoughts on how insurance companies that were mutualized profited: https://mediacentral.princeton.edu/medi ... 1_rutvhinh
(start at 1:01:31)

And on a final note, I've never heard of Max Beer, but I've heard of Bogle wine.
I almost took a photo of the Bogle Wine I saw at the store to post it here :-P
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Re: Max Beer on Vanguard

Post by JD2775 »

anyone else let down by the post title?

I was hoping this was a new perk from Vanguard
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Re: Max Beer on Vanguard

Post by fsrph »

arcticpineapplecorp. wrote: Tue Jun 06, 2023 8:59 pm
And on a final note, I've never heard of Max Beer, but I've heard of Bogle wine.
I've never heard of him either. At first glance I thought he was the guy who played Jethro on the "Beverly Hillbillies".

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Re: Max Beer on Vanguard

Post by SmileyFace »

JD2775 wrote: Wed Jun 07, 2023 10:10 am anyone else let down by the post title?

I was hoping this was a new perk from Vanguard
I definitely thought we would be talking about Ales and Largers when I hopped in.
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Re: Max Beer on Vanguard

Post by nisiprius »

JD2775 wrote: Wed Jun 07, 2023 10:10 am anyone else let down by the post title?

I was hoping this was a new perk from Vanguard
Coffee, maybe. Insert pun on "perk" here.

For a brief period of time, Vanguard conducted a goofy campaign driving a coffee truck from city to city selling coffee for $0.26 a cup. The idea was that they were selling it "at cost," just like Vanguard mutual funds.

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Re: Max Beer on Vanguard

Post by Cheez-It Guy »

I don't find that particularly goofy for people with no knowledge of personal finance. It's easier to understand than expense ratios. Many people don't even have a fundamental understanding of percentages.
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