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Vanguard: Competitors' Pricing Behavior Is Inconsistent

Christine Benz

Note: This video is the third of a six-part interview between Morningstar director of personal finance Christine Benz and Vanguard president and CEO Tim Buckley.

Christine Benz: Let's talk about the emergence of competitors who seem determined to sort of out Vanguard Vanguard in terms of costs and making their lineups attractive to people with fairly low minimum initial purchases. What do you make of that phenomenon, and how does that affect your thinking about Vanguard's lineup and the competitiveness of it?

Tim Buckley: We hear a lot in the press and advertisements about competitors embracing low costs.

Benz: Or zero costs.

Buckley: Yeah, zero costs, right. We only wish it were true, that they were truly embracing this and not using it as a marketing ploy. We firmly believe that costs are that part of your return you can truly control, and keeping costs low in the portfolio is really important. These competitors, they should bring down costs around the whole portfolio, not just in the couple of products where they feel like they need to compete with us. Why aren't their active fund expense ratios coming down? Why aren't they paying people more on their cash? Why are they taking, in some cases, a lion's share of whatever yield would be on that cash? Their behavior isn't consistent across the board. We'd like to see those costs come down overall. It's easy to try and be a price leader in one or two products. We believe in leading the across the board.

Benz: I spoke with our passives research team at Morningstar and asked them what would be good questions for you, and following up on that, one related question was the investor share class of the index funds. They feel that they look somewhat uncompetitive relative to people who have similar minimum purchase amounts. Let's talk about that. Are you looking at the pricing of those investor share classes, the ones available for, say, $3,000 minimums?

Buckley: We are always looking at the pricing of our funds and what's fair and what's best for investors. If you look at the different share classes, they were born kind of trying to be equitable between investors of different asset levels. If you just look at, say, Total Stock Market, and you look at the admiral share class, you get at $10,000, you get investor at $3,000. Well, at their expense ratios, both investors pay roughly $4 a year for their account to be run. That's where the difference comes in. 

Now, that was set years ago and we always revisit it. We'll revisit it and say how have things changed? Has technology changed the cost to run that account? We want to make sure with our mutual structure that people are paying their fair share, but those things change over time and we'll always look at them and we'll always go for the simplicity if we can achieve it.