What Could Stop Vanguard From World Domination?

This past week Vanguard surpassed $4 trillion in assets under management. This is impressive on a number of levels, especially when you consider they just passed the $1 trillion mark less than ten years ago and that time frame includes the worst stock market crash since the Great Depression.

Here are some more stats to that show you just how dominant Vanguard is at the moment in the fund industry:

  • According to Morningstar, there was $533 billion of net flows into all mutual funds and exchange-traded funds last year. Vanguard brought in $305 billion or more than half of that total. That means Vanguard took in more money than the rest of the mutual fund industry combined!
  • Vanguard was late to the ETF game but $93 billion of that 2016 haul went into ETFs.
  • In January of 2017 alone Vanguard brought in nearly $50 billion. At that pace they’ll blow the record they set last year in terms of flows out of the water.
  • According to Eric Balchunas at Bloomberg, the top five mutual funds that took in the most money in 2016 were all Vanguard index funds.
  • Vanguard is also in the top three in terms of percentage of ownership in 92% of all S&P 500 stocks. They are the biggest owner of 43% of S&P 500 names.

There are many reasons for Vanguard’s success but here are the main ones I came up with:

  • Their ownership structure. Vanguard is owned by their mutual funds and thus their investors. They aren’t a public company. They don’t have any quarterly earnings targets to hit so any efficiencies or scale gets passed along to their clients by way of lower fees. When Bogle chose this route when he founded Vanguard he theoretically left billions on the table. Those (and many more) billions have instead gone to Vanguard investors as cost savings.
  • Right place, right time. Investors now have easy access to performance history, fees and track records. They’re becoming better educated and understand that the majority of mutual funds underperform and fees are the number one predictor of future success. The financial crisis only further cemented these ideas.
  • Culture. Jack Bogle once said, “Ideas are a dime a dozen but implementation is everything.” Index funds are not a novel idea by any stretch of the imagination. Any fund company could have done what Vanguard did. They had some first mover advantages but still had to execute.
  • Brand. It’s rarely discussed but Vanguard has built one of the most powerful brands of any company on the planet. You know exactly what you’re going to get with Vanguard when you become one of their investors. You can’t say that about most firms, investment or otherwise.
  • Leadership. Bogle rightfully gets all the credit but his successors — first Jack Brennan and now Bill McNabb — have masterfully taken Bogle’s original message and executed flawlessly. I saw McNabb speak at our conference a few months ago and they guy had an articulate answer for everything. The company is in good hands.

When you throw in the fact that index funds and passive investments are slowing eating active fund assets, it would seem that Vanguard should continue to dominate the fund world for years to come.

So what could slow them down or even get in their way of entire fund world domination?

How they handle this growth and success could have a huge effect on where things go from here. The following comes from a recent story by Investment News about how last year’s flows affected client communication efforts:

“The volumes were off the charts, beyond our forecasts: We handled more than 10 million phone calls, answered 1.4 million emails, and transacted 17 million brokerage trades,” said Vanguard spokesman John Woerth.

Not surprisingly, not all of those transactions have gone smoothly.

“We’ve had enough complaints about Vanguard’s service that we really can’t ignore them,” said Jeff DeMaso, director of research at advisory firm Adviser Investments. “We’ve heard a lot of complaints about required minimum distributions and reinvesting distributions,” he said.

I’ve heard from a number of readers, family members and friends that the call times can be ridiculous when trying to get a hold of someone at Vanguard. Customer service could end up being a huge problem for them if it’s not addressed. Someone has to be able to answer questions for all of these new investors flooding them with assets.

This will be even more important in the years ahead as millions of baby boomers hit retirement age each year. Saving, investing and building wealth over time is much easier than knowing what to do with it in retirement. People need help with asset allocation, required minimum distributions, withdrawal strategies, tax planning and all of the other financial planning issues that arise during retirement years. Financial advice is much more important than investment management for the majority of people and these investors are going to need someone to aid them in this process.

I’ve referenced this stat before but it bears repeating — CEO Bill McNabb told my colleague Barry Ritholtz that Vanguard had around $500 billion under management with 12,000 people in the year 2000. Today they have $4 trillion but have only increased headcount to a little less than 15,000 employees.

This is great in terms of costs and efficiencies but my guess is that number will have to rise substantially in the years ahead to keep pace with their growing asset base. In the Investment News piece, Vanguard did say that they’re looking to add 1,700 new employees in 2017 to address some of these concerns.

Vanguard has some of the most loyal investors of any fund company out there. I would imagine they’ll take the correct steps to get these issues figured out for those investors. Customer complaints aside, I still think Vanguard’s dominance will continue and eventually they will more or less own the fund world.

The shift to low-cost investments is not a fad that’s going away anytime soon.

But how they handle their massive growth in terms of client service is something worth keeping an eye on going forward. They have to keep their clients happy to retain and further increase their fund flows in the future.

At Vanguard, customer complaints rise along with assets (Investment News)

Further Reading:
Investment Management vs. Financial Advice