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  • msf November 2015
Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

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Whistleblowing the expense ratio limbo

ibartman
edited November 2015 in Fund Discussions
With respect to the tax case (previously reported and discussed, see for example, link below) reported in Philly paper - which claims that "Vanguard has no legal justification for charging its mutual funds artificially low management fees that reduce its reported profits and tax obligations" - it seems that one strategy [?] might be to just wait-it-out.

As reported here - http://tinyurl.com/blkrk-schwab-cuts - others are now charging around 3 bps or so for broad-based ETFs. Once others charge next to nothing, it seems (to this non-lawyer) that this might improve Vanguard's position.

Philly.com: http://articles.philly.com/2015-09-24/business/66826472_1_washington-tax-journal-tax-law-lee-sheppard

Comments

  • msf
    The complaint is not that The Vanguard Group (VG - management company) is charging each Vanguard fund too little (in an absolute sense, e.g. under 10 bp), but that VG is not charging enough to make a profit.

    Vanguard is not only conceding that factual point, but advertising it - Vanguard says that VG charges the funds "cost" - no profit built in.

    The fact that other management companies supposedly make profits (I have my doubts - they may be using these ETFs as loss leaders) does not mean that VG is making a profit on its 10bp charges. And if it were, it would likely be guilty of fraud - false advertising (paying only "cost") designed to induce people to buy their funds.

    So we've got two possibilities - VG is providing services "at cost" (which is the point of the complaint), or VG is making a profit (and advertising falsely).

    A quick recap of the complaint - if the funds and VG are considered "affiliated", then the management fees must be determined by "arms length" negotiations - as if VG were a regular management firm seeking a profit. But the fees are lower than they "should" be since (according to Vanguard) they are designed not to generate a profit.

    From an investor perspective, it doesn't matter - if VG were to make a profit, it would just get returned to the funds, since the funds are the "shareholders" of VG. No net effect to investors. But that flow of money - profits for VG (from higher management fees) returned to shareholders, would be taxable (profits are taxable, dividends are taxable). If Vanguard loses, the effect would be to send some of the fund money to the US Treasury in the form of taxes. Vanguard wouldn't lose money, its fund investors would.
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