As I wrote to you here, now that Vanguard and other money managers are charging next to nothing for ETFs and index funds, there is a push for higher fee offerings, such as ESG funds.
In an interview with ETF.com‘s Allan Roth (comments in italics), new Vanguard CEO Salim Ramji (comments in bold), discusses the company’s revenue needs:
Are systems and customer service related and how will you be addressing these issues?
They are related. Modernization started three years ago though perhaps could have started earlier. We are making behind the scenes investments. When completed, this will give us the ability to innovate and apply new interfaces and visuals faster. I’m determined to make sure the job gets done. We will have the most modern technology infrastructure in the industry. We will continue to make investments. It’s a journey and we will match and then exceed competitors’ capabilities.
How can Vanguard make these investments given it has 27% of the fund industry assets but only about 5% of revenue, according to Eric Balchunas of Bloomberg? Competitors have expensive products that can cross-subsidize to allow them to offer loss leaders such as index funds with even lower expense ratios so how will Vanguard compete?
We can compete. Our competitors have some hidden and not so hidden subsidies. Our model gives us a natural advantage in that we don’t have shareholders with different priorities than our clients. Thus, when we have a surplus, we return it to our clients with lower costs. This advantage, along with our large scale, allows us to compete and continue to make investments.
There is a theory (that I may have started) that Vanguard would like to see smaller clients move to Vanguard’s Personal Advisory Services or, if they don’t, Vanguard is happy if the client moves their Vanguard funds to Fidelity or Schwab and let them do the record keeping and reporting. What do you think of that theory?
The theory could make sense for a publicly held or any for-profit company but not us. The beauty of the model is that we only work for one constituency—the client. We don’t want clients to leave.
Action Line: Vanguard is planning a number of ways to generate more revenues from customers, including demanding $25 payments for telephone transactions. When you want to talk about your portfolio, I’m here. Learn more about the problems at Vanguard by downloading my free SPECIAL REPORT: The Trouble with BlackRo… er… ummm, Vanguard.
P.S. Read the entire interview here.
