Season Investments

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The Vanguard Effect

Posted on March 7, 2017

“The company's influence leads other funds to lower their fees in order to better compete.” - Bloomberg

2017-03-07_cost.jpgThe word “vanguard” is defined as a group of people leading the way in new development or ideas. Over the past forty years The Vanguard Group has been just that. Now one of the strongest brands in global finance, the company’s name has become virtually interchangeable with low fees and expenses. This dynamic is so pronounced that it has even become known as “The Vanguard Effect” and is credited for pushing fees and expenses dramatically lower across the entire investment industry. According to the company’s own website, their lower expense ratios have saved investors over $3 billion since the mid-70’s!

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Vanguard has grown rapidly into a corporate behemoth, even causing some well documented strain on customer service and client satisfaction in recent years. But at $4 trillion in assets under management, the company does not appear to be slowing down anytime soon. In 2016 Vanguard brought over $300 billion into its ETFs and Mutual Funds – more than the rest of the industry combined. And with $50 billion of net inflows in January alone, it appears 2017 might be another one for the record books. 

Other organizations have taken notice and are aggressively following suit. In addition to lowering fund expense ratios and focusing more marketing dollars on low-cost index products, fees and expenses are being slashed across the board. Most recently, Fidelity investments announced that its online trading commissions were being lowered from $7.95 to $4.95/trade, lower than virtually any of the other large brokers including TD Ameritrade, Scottrade, E*Trade - and yes, even Vanguard. Within hours of Fidelity’s announcement we had the following email in our inbox from Charles Schwab, our primary custodian:

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Schwab followed Fidelity’s suit and lowered their online trading commission from $6.95 to $4.95/trade. For historical context, according to this Business Insider article the average commission thirty years ago was around $45/trade, but “could often climb much into the hundreds or thousands depending on the size of the order.” Brokerage houses and fund companies are realizing that can’t get away with charging high fees on products and services that investors can get for cheaper elsewhere. The modern investor is more cost conscientious, and is simply going to be more price sensitive than he or she was historically. 

Vanguard is clearly at the forefront of the global trends toward transparency, simplicity and low-costs in investment portfolios. We are big fans of what this company stands for and applaud the amazing progress they’ve induced across the industry in recent decades. But in this respect we are also quite proud to be working with Charles Schwab as our primary custodian. Many people don’t know this, but Schwab has some of the cheapest fund offerings on the planet. The company’s S&P 500 ETF, for instance, has an expense ratio of only 0.03% - beating out Vanguard’s equivalent product. They even highlight this on their website, which again speaks to how influential Vanguard has been in setting the benchmark.

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Even though we are in no way constrained to holding Schwab-branded funds in our client accounts, the firm’s efforts on the fees and expenses front speak to a corporate mindset that understands and embraces the changes sweeping the investment industry.

As a firm we believe Season Investments has always been very conscientious about fees and expenses. We always seek out the cheapest possible vehicle for expressing a given investment conviction, and when possible we utilize low-cost index funds that are commission-free on Schwab’s platform. We have long been critics of the majority of actively managed stock mutual funds which charge outsized fees for “active management”, even though this active management doesn’t statistically deliver anything superior to the available indexes. Our goal is to eliminate any and all unnecessary fees and expenses, and we are ultimately held accountable to that goal by the bottom line in client portfolios which is always reported net of all costs.

The shift to lower investment costs is not a fad, it’s a permanent structural improvement in the investment landscape - one that we are in favor of. That said, it’s important to remember that not all fees are created equal, and there are some costs worth incurring. Additionally, the explosion of transparency, information flow and mobile access to trading platforms also opens the door to potentially dysfunctional behavior on the part of individual investors. These will be the topics of discussion in our post next Tuesday.


david_headshot_bw.jpgAuthor David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.


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Transparency is one of the defining characteristics of our firm. As such, it is our goal to communicate with our clients frequently and in a straightforward way about what we are doing in their portfolios and why. This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities. It represents only the opinions of Season Investments. Any views expressed are provided for informational purposes only and should not be construed as an offer, an endorsement, or inducement to invest.