by John Jagerson
Vanguard was formed as a mutual fund company by legendary investor John Bogle in 1974. The company deserves most of the credit for popularizing "index investing" as a way to lower costs and increase performance. Although the company is well known for its suite of mutual funds the firm also sponsors many popular ETFs.
Who is the broker targeting?
Vanguard is targeting long term investors or investors and traders with a portion of their portfolio dedicated to long term investing strategies. Although you can trade stocks or options within a Vanguard account this is really not what they do best. However, if you are looking for a way to absolutely minimize your costs within an indexed and diversified portfolio, Vanguard probably can't be beat.
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Ease of Use:
Because Vanguard does not specialize in trading platforms or functionality it is not very useful to dive into their order entry processes and functionality. However, the investing activities that are necessary are easy to execute and should not be difficult for anyone regardless of the size of your account.
Costs and Commissions:
Traders are drawn to Vanguard because of a comprehensive spectrum of indexed funds that are available for just about any long term investing objective and for the low costs associated with investing through the firm.
The impact of costs should not be underestimated. Consider, for example, the data produced by the Congressional Research Service in the United States in 2006. Their report stated that the average U.S. investor is paying .74% in fees per year in a standard retirement plan such as a 401K. However, if those fees were reduced to .4% the same investor would make 35% more over a 30 year retirement plan.
That increase in performance is significant. Now consider that Vanguard funds have an average expense ratio of .2%, which is half of the hypothetical best case scenario considered by the U.S. Congress. In light of this information it is difficult not to see the standard retirement planning service as anything but a massive scheme to transfer wealth from investors to managers.
Vanguard is able to lower costs like this by indexing their funds rather than actively managing their portfolios. Indexing outperforms comparable managed funds 70% of the time so this really puts the odds in the investor's favor.
If you are just buying and reinvesting in Vanguard funds as an account holder you will pay virtually no other fees. This keeps costs way down.
Learn more about why published brokerage rates are usually meaningless.
Pros and Cons:
The pros for Vanguard can be summarized in three ways. First, they are the low cost leader. The firm virtually invented the indexed mutual fund business and have been doing it successfully for decades. Second the firm has a wide range of investment products available. You can invest in funds that cover everything from short term treasuries to international stocks. Finally, customer service is available, responsive and courteous.
There are two significant cons when considering Vanguard. First, Vanguard is not a low cost broker for active trading. Trading stocks and options with Vanguard is possible but it is expensive and not very convenient. The firm is highly specialized and should not be considered a one-stop-shop for active investors.
Second, although Vanguard's support staff were friendly and available they did not have a great depth of product and market knowledge. We were referred back to the online documentation for most of our detailed product questions. The documentation was informative but it would be difficult for a new investor to fully understand all the material.
Conclusion:
Overall Vanguard earned a place on our recommended broker list. Not every investor is looking for a place for long term investments but if you are you would be well-served to evaluate Vanguard as a potential broker for some or all of your long-term horizon investments. Costs, products and service was excellent and a little investor education will fill in any gaps.
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