In the late 1990s, Adidas ran a series of ads that said, “Runners, yeah, we’re different.” One ad featured a guy putting a Band-Aid on his nipples. Another showed a pregnant women running with a toddler-packed stroller. Yet another looked like a mud caked nudist toweling off behind his car. Vanguard, one of the world’s largest investment companies, could run something similar.
Vanguard is structured much like a non-profit firm. That’s what makes it different. Banks, in contrast, are either privately owned or they trade on the stock market. Either way, they are owned by investors seeking a return. So don’t believe their advertising claims. Despite the warm and fuzzy “customers come first” T.V. commercials, bank customers come second. Their shareholders ride on top.
It’s much the same for mutual fund companies like Franklin Resources Inc. (BEN), AllianceBernstein Holding LP (AB), T. Rowe Price Group Inc. (TROW), Legg Mason Inc. (LM), Janus Capital Group Inc. (JNS), Federated Investors Inc. (FII) and Cohen & Steers Inc. (CNS). Over time, a company’s stock price rises in proportion to business earnings. Shareholders would love nothing more than for fund fees to rise while investors go to sleep.
Privately held firms, like Fidelity, don’t trade on a public exchange. Fidelity’s billionaire founding family (the Johnsons) grew rich off the fund fees they charged.
Vanguard is the oddball putting Band-Aids on its nipples. Its shares don’t trade on a stock exchange. No private fat cats own the company. Instead, its fund fees go towards employee’s salaries and business operating costs. When the money from fees exceeds the cost of doing business, Vanguard lowers its fees. Vanguard was built for the people who invest with it.
That’s why David Danon, a former Vanguard tax lawyer, probably won’t be voted America’s Man of the Year. In 2013, he filed a complaint with the IRS and other state tax authorities saying that Vanguard’s low fees are an illegal tax dodge. Under a 2006 law, a tax whistleblower may collect 15 to 30 percent of what the IRS collects. According to Newsweek, Danon could reap up to $10 billion if he’s successful.
Newsweek writer, David Cay Johnston said, “The California Franchise Tax Board sent Danon an email saying his complaint against Vanguard warranted assigning criminal investigators. Vanguard could be on the hook for about $750 million there.”
New York State, however, dismissed Danon’s case because he was working for Vanguard when he filed the complaint. Payouts, for the former Vanguard lawyer, haven’t come swiftly. So far, only Texas has awarded him a bounty. Bloomberg reported that Vanguard recently agreed to pay back taxes in Texas. Under Texas law, whistleblowers can get up to 5 percent of what the state reclaims. David Danon collected $117,000.
The big question is whether Vanguard will need to increase investment fees to cover back taxes. Vanguard spokesperson, John S. Woerth, says such thinking is “suspect and speculative.” He adds that the firm is “confident in our approach to paying the fair and appropriate amount of taxes.”
Vanguard isn’t just talking. They’re walking a confident walk. Danon first filed his complaint in 2013. Vanguard’s actions implied they weren’t concerned. In 2014, Vanguard reduced fees on 90 of its funds, including 31 ETFs. In 2015, Vanguard reduced fees for 102 funds, including 28 ETFs. On December 22nd, the firm announced that it dropped fees again. Fees fell for 53 funds, including 21 ETFs.
Media headlines may scare investors who fear that Vanguard might have to raise its fees. But the firm’s actions seem to say that they aren’t worried at all.
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas