Vanguard CEO Bill McNabb.

Fund giant Vanguard said early Tuesday that investors have more money in their investment accounts thanks to lower expense ratios it put in place last year. In fact, the lower ratios saved clients some $12.4 million from August 2014 to August 2015, the fund group says.

“Vanguard continues to set the standard as the industry’s low-cost leader, reducing costs not just on a subset of products, but across our funds and ETFs,” said Vanguard CEO Bill McNabb, in a statement. “We have a track record of nearly 40 years of lowering the cost of investing for our clients and we have every intention of continuing to lower the cost of investing.”

During the 2015 calendar year, Vanguard adds that it reported expense ratio reductions for 102 individual mutual fund shares, of which 28 were ETF shares, while the fund group reported lower expense ratios for 90 individual mutual fund shares, including 31 ETF shares, in 2014.

Industry Impact

According to a recent Bloomberg report, the impact of index funds and lower fees has resulted in a decrease of some $20 billion in yearly revenue for the financial industry.

As of Dec. 1, the level of net flows into index funds (including ETF shares) across the industry stands at $365 billion, Bloomberg says. Meanwhile, active mutual funds have seen outflows of $147 billion, according to the Investment Company Institute. On a combined basis, that represents a roughly half-a-trillion-dollar swing.

Vanguard attracted $185 billion, or about 55% of the total inflow. However, its rise – along with that of other passive managers, like BlackRock – is happening while more traditional Wall Street firms are under pressure to improve profits.

At the time it issued its report, Bloomberg estimated that Vanguard would be drawing some $16 billion out of the financial industry each year via fee reductions and asset flows into passive funds. (This figure is based on the average asset-weighted fee of a Vanguard fund of 0.13% vs. 0.66% for an active mutual fund.

Extrapolating on this trend, Vanguard and other indexers could remove some $40 billion in revenue each year from the financial industry by 2020.

In addition to this “direct effect,” other funds are lowering their fees to compete, resulting in a so-called Vanguard Effect, which further lowers revenue for Wall Street and other fund players, the Bloomberg report argues, comparing Vanguard to Walmart.

(As the performance of active funds and the higher fees tied to such investments have come under closer scrutiny, the Department of Labor has moved to rewrite advisor’s fiduciary standard in order to promote retirement savings via increased transparency and access to products with lower fees.)

Specific Changes

Twenty-four Vanguard bond index fund shares had lower expense ratios in 2015, the firm says. For example, fees related to the $13.2 billion Vanguard Short-Term Corporate Bond Index Fund’s Admiral shares fell 2 basis points to 0.10% as did fees on the fund’s ETF shares; fees for institutional shares dropped by 2 basis points to 0.07%. A

Twenty equity sector index fund shares had lower expense ratios. The largest, the $8.7 billion Vanguard Information Technology Index Fund, reduced fees on Admiral and ETF shares to 2 basis points to 0.10%. In the size/style fund group, Vanguard dropped the fee on six fund shares. The Vanguard Mega Cap Growth Index Fund, for example, lowered the expense ratios of institutional and ETF shares by 2 basis points to 0.08% and 0.09%, respectively.

Fees were also dropped on the $2 billion Vanguard FTSE Social Index Fund and the $307.6 million Vanguard Explorer Value Fund.

In the actively managed category, the expense ratio for the Vanguard Explorer Value fund declined slightly from 0.66% to 0.65%. However, it rose for the Vanguard U.S. Growth Fund for Admiral shares – which expanded from 0.3 to 0.33 – and for Investor shares, which expanded from 0.44% to 0.47%.

“In this instance, the changes are largely the result of an incentive fee paid to the fund’s advisors,” the company explained in a press release.

Fund Arrangements

According to Vanguard, the fund giants works with its external investment advisory firms to “align” their interests with those of shareholders through incentive/penalty arrangements.

“Under the majority of Vanguard fund advisory agreements, an external advisor’s base advisory fee can be adjusted up or down to reflect the fund’s investment performance relative to the total return of an appropriate market benchmark over a 36-month period,” it added.

These arrangements aim to reward investment advisors for outperforming a market benchmark and penalize them for underperforming it. The fund firm says it is one of only a few firms in the industry to employ such arrangements.

Back in 1975, Vanguard’s average expense ratio for its funds — and $1.8 billion of assets — was 0.89%. Today, with $3.2 trillion in assets, the average expense ratio stands at 0.18%.

— Check out Vanguard’s Gain Is Wall Street’s Pain as Billions Leave Financial Industry on ThinkAdvisor.