FOUNDING FATHER: John C Bogle
The Pennsylvania-based company, founded by John C Bogle, has an incredible $4.2 trillion (£3.3 trillion) of funds under management, second only to BlackRock with £4.2 trillion.
The fast-growing fund house has operated in the UK for the past eight years, offering a range of passive index trackers known as exchange traded funds (ETFs), boasting some of the lowest charges in the industry.
Many investors will have bought Vanguard’s low-cost funds through their financial advisers or fund supermarkets, but its new website bypasses these middleman.
This threatens to shake up how we invest in tax-free individual savings accounts (Isas), and poses a threat to established rivals such as Hargreaves Lansdown and Fidelity FundsNetwork.
Should you join the Vanguard?
Earlier this month, Vanguard announced plans to sell its wide range of ETFs, including its popular LifeStrategy funds, direct to consumers, bypassing brokers and financial advisers.
Vanguard is perhaps the biggest fund manager you have never heard of
The new online service, VanguardInvestor.co.uk, allows private investors to open an account with as little as £500 or a monthly investment of £100.
The real benefit will come if Vanguard scares the established platforms into cutting their fees
Its flat administrative fee of just 0.15 per cent is capped at £375 a year, significantly undercutting Hargreaves Lansdown at 0.45 per cent or Fidelity at 0.35 per cent. Its fund range also has low underlying charges, often about 0.22 per cent.
Damien Fahy, founder of investment website MoneyToTheMasses.com, says this could prove a “watershed moment” as Vanguard’s pricing structure completely undercuts its competitors: “If someone invested their full £20,000 Isa allowance, they would pay total charges of just 0.37 per cent a year.
The Pennsylvania-based company has an incredible $4.2 trillion of funds under management
On some of the bigger established platforms you pay more than 1.8 per cent.
“That might not seem a big difference, but annual charges compound year after year, ultimately costing investors outsized sums.”
If you invested £20,000 and your money grew at 5 per cent a year with charges of just 0.37 per cent, after 20 years you would have £49,450. With fees of 1.8 per cent you would have just £37,550, an incredible £11,900 less.
When Vanguard announced its move, the Hargreaves Lansdown’s share price fell sharply, as investors feared it would be forced to cut its prices to compete, hitting its profitability.
Fahy says investors will be hoping Vanguard draws the likes of Hargreaves, Fidelity, Interactive Investors, Alliance Trust and Chelsea Financial Services into a price war: “Established players will now have to either cut or justify their platform fees, which are up to four times higher than Vanguard’s.”
Fund managers and independent financial advisers may also come under pressure to cut their charges. “This is fantastic news for UK investors, even if they never buy a single Vanguard fund, as it will give the investment world a much-needed shake-up and reduce costs across the board,” he added.
He hopes it will increase pressure on City watchdog the Financial Conduct Authority to make it easier to switch platforms.
VANGUARD OF CHANGE
Hargreaves Lansdown chartered financial planner Danny Cox agrees that more competition will benefit investors and broaden the market, but says Vanguard will offer a choice of just 65 of its own funds, mostly ETFs: “By contrast, the big platforms offer thousands of stocks and shares, funds and trusts from different managers, as well as Isas and self-invested personal pensions.
Vanguard’s new website bypasses the middleman
“Most investors believe we offer exceptional service and value for money.”
Justin Modray, an independent financial adviser at Candid Financial Advice, says Vanguard’s big drawback is that it does not offer a pension: “It might attract those with smaller Isa portfolios happy to invest in trackers, but is unlikely to appeal to others.
“The real benefit will come if Vanguard scares the established platforms into cutting their fees, which is long overdue.”