Low cost, customer service and quality: As the adage goes, you can have two out of three, but never all at once.
Industry behemoth Vanguard has built its business — now at $5 trillion of assets and counting — by offering low-cost products tied to indices and excellent customer service. Since the days of Jack Bogle, the firm carved out a niche and clearly the results speak for themselves.
But in late November, Vanguard stepped partially out of its well-established comfort zone and jumped on the actively managed ETF bandwagon here in the U.S. Whereas its index-based products are passive and don’t require significant human monitoring or intervention, the mere definition of actively managed products means the significant involvement of human brain power in the making of decisions that attempt to beat the index.
Traditionally, active management and low cost have been mutually exclusive, and for good reason. Active managers with a track record of success are like professional athletes — healthy compensation follows strong results — and investment advisory and fund management firms recruit and compete for that talent. This competition is like the free agent markets in professional sports: lucrative salaries that have to be paid for from somewhere.
The situation creates a set of goals that work against one another. Vanguard’s ability to offer low cost and well conceived and marketed funds is truly unmatched. Can active management, with the need to pay for the talent to manage those portfolios, fit into the business model where low cost is virtually synonymous with the Vanguard brand?
This situation reminds me of when the banks decided to offer mutual funds a few decades ago. They saw the writing on the wall and figured that because the bank held people’s deposits and loans, they might as well offer them investment products.
To some extent, they’ve been successful. However, they haven’t been able to squeeze out their competition that focuses solely on offering mutual funds, and I will argue that there is not anyone out there who would say that large banks’ core strengths are their mutual funds.