Must-read: Justin Fox: “Vanguard’s Low Blow”

Justin Fox: Vanguard’s Low Blow: “Vanguard tax lawyer turned whistle-blower David Danon and his hired expert, University of Michigan law professor Reuven S. Avi-Yonah…

… are… reasoning… [that] Vanguard is cheating state and federal tax authorities by charging its customers much less than other fund companies do. Which is exactly as bonkers as it sounds…. My Bloomberg View colleague Matt Levine has dubbed this ‘the faked moon landing of financial news stories, except that it might be true.’ Danon collected a $117,000 whistle-blower bounty in Texas in November, meaning that Vanguard paid the state at least $2.3 million. It’s possible that Vanguard’s payment had nothing to do with the fee issue–a company spokesman told Bloomberg’s Jesse Drucker that Danon’s arguments didn’t come up in the company’s discussions with state tax authorities…. At almost every mutual-fund group other than Vanguard, the management company is out to make a profit, so charging too-low fees isn’t really an issue. But at Vanguard, the funds… own the management company, and expect it to keep fees as low as possible. Why the difference? A little history is in order, in part because it shows that Vanguard isn’t so much a weird outlier as a worthy carrier of the mutual-fund tradition….

Vanguard is run on behalf of its customers, who also happen to be its owners. It has revolutionized the money-management business, putting pressure on competitors to lower fees…. It’s a virtuous cycle that has both changed investing for the better and brought the mutual-fund industry back closer to its roots. If the IRS or the courts decide to go after Vanguard for its frugality, it would amount to throwing all this into reverse…. Saying that competition on the basis of price shouldn’t be allowed… sounds awfully un-American.


Brad DeLong
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