Solving the cost and quality paradox
15 May 2017 | Topical insights
Commentary by Sean Hagerty, Vanguard's managing director in Europe.
I've worked for Vanguard for nearly 20 years, and a question I've heard a lot over the years is: "How can you deliver high-quality products and services at such low cost?"
It's an understandable question, because in most walks of life there is a trade-off between cost and quality. But at Vanguard, things are different.
The most fundamental difference, and the source of the "magic" that makes this paradox work, is our ownership structure. The Vanguard Group in the United States is owned by Vanguard's US funds, which in turn are owned by their investors. This means we can keep costs low for our clients globally because, crucially, we don't have external shareholders to pay.
Think about the average fund management company. Chances are it's publicly owned. Its shares trade on the stock exchange; it has to report quarterly earnings and it has growth and dividend expectations to live up to. It might say that it's client-focused, but when it comes to the crunch, the first line in the annual report will probably be about how much value it's created for its shareholders rather than its clients.
There's a conflict of interest in this model. For any money the company makes, the company's first impulse will be to give that money to the shareholders, either in the form of a dividend, a share buy-back or by some other method.
At Vanguard we have the same impulse – only here, our owners are our investors. We don't have to pay external shareholders, so we have a simple choice: invest in our business or return the money to investors in the form of lower costs.
The other advantage of not being publicly traded is that we don't have the quarterly cycle of earnings reports. We don't have to rush to launch new products, take over our rivals or generate other corporate news every three months – we can afford to take a longer view based purely on providing the products and services that our customers need.
But there's another layer of magic that I want to highlight. In some businesses, that lack of short-term shareholder scrutiny could lead to complacency and corporate flab. Not at Vanguard. Here, we're driven every day by our mission of changing the way the world invests. That's why we're here in the UK – because we believe that British investors deserve a better deal than they've had in the past.
That mission is reflected in a relentless drive to improve efficiency, remove obstacles and raise the bar in everything we do. In practice this means making thousands of decisions across the business each day, some big and some small, but all guided by a culture of doing the right thing and improving outcomes for our investors.
It helps that our staff – the "crew", as we call them – understand and identify with our corporate mission. Twenty years in, I know that changing the way the world invests is what gets me out of bed in the morning, and I know my colleagues in the UK and across the globe think the same way.
So that's how we solve the paradox: 50% structure and 50% culture.
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
The opinions expressed in this article are those of the individual author and may not be representative of Vanguard Asset Management, Limited.