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Vanguard, Facing Whistle-Blower Cases, Agrees To Pay Texas Taxes
Does this drop the "Fiduciary Grade" of Vanguard at M*. I guess not. First, I think this does not "affect" investors. Second, M* will figure out a way to not do it
No, Vanguard does that all the time with outside firms. For example, Vanguard Primecap, VPMCX, paid PRIMECAP Management Company 0.20% last year. From the fund prospectus:
For the fiscal year ended September 30, 2014, the advisory fee represented an effective annual rate of 0.20% of the Fund’s average net assets.
In contrast, Primecap Odyssey funds (e.g. POGRX) paid PRIMECAP Management Company 0.55% last year. From its prospectus:
For the fiscal year ended October 31, 2014, the Advisor received advisory fees of 0.55% of the average daily net assets of each Fund.
Vanguard may strike a hard bargain, but PRIMECAP Management Company still made money on that deal, and paid taxes on it.
Unlike PRIMECAP Management, the Vanguard Group did not negotiate with the funds. It did not seek a profit, but colluded with the funds to provide services at cost. Had Vanguard Group charged the funds a low but profitable fee, the net profits would have gone back to the fund investors anyway (since the funds own the Vanguard Group and thus get all of the profits). Vanguard short circuited this by having the Vanguard Group not get a profit, so there was no profit to return.
Sounds like a distinction without a difference, until you look at one word I inserted: "net". The "net" profits that the Vanguard Group would have made were the gross profits less taxes. If the transaction were booked differently (as profit making, and profits returned to investors), there would have been taxes owed.
So the only effective difference between the way Vanguard set up its fees and the way it "should have" (i.e. via arms length negotiations as it did with PRIMECAP), is that it would have owed taxes. The structure looks like a tax dodge.
As John Bogle has said, Vanguard is a mutual mutual fund company, analogous to mutual insurance companies. These are companies owned by their policy holders. They charge annual premiums, and whatever profits they make (by charging more than cost) are returned to their policy holders. My question is: how are these profits taxed? It seems that Vanguard should be treated the same way. (I don't know the answer to my question, but it seems to go to the crux of the matter).
Comments
Unlike PRIMECAP Management, the Vanguard Group did not negotiate with the funds. It did not seek a profit, but colluded with the funds to provide services at cost. Had Vanguard Group charged the funds a low but profitable fee, the net profits would have gone back to the fund investors anyway (since the funds own the Vanguard Group and thus get all of the profits). Vanguard short circuited this by having the Vanguard Group not get a profit, so there was no profit to return.
Sounds like a distinction without a difference, until you look at one word I inserted: "net". The "net" profits that the Vanguard Group would have made were the gross profits less taxes. If the transaction were booked differently (as profit making, and profits returned to investors), there would have been taxes owed.
So the only effective difference between the way Vanguard set up its fees and the way it "should have" (i.e. via arms length negotiations as it did with PRIMECAP), is that it would have owed taxes. The structure looks like a tax dodge.
As John Bogle has said, Vanguard is a mutual mutual fund company, analogous to mutual insurance companies. These are companies owned by their policy holders. They charge annual premiums, and whatever profits they make (by charging more than cost) are returned to their policy holders. My question is: how are these profits taxed? It seems that Vanguard should be treated the same way. (I don't know the answer to my question, but it seems to go to the crux of the matter).