While listening to groups of investors recently as part of some research, we learned something that was, to us, a bit disappointing.

And thereby hangs a tale.

One thing the research confirmed is that even a good number of Vanguard clients don’t know the single most important thing to know about Vanguard.

And that’s this: Unlike all other mutual fund companies, Vanguard is client-owned. The clients who put their dollars in our mutual funds are the owners of those funds. And those funds, in turn, own Vanguard. The bottom line: Vanguard does not make a profit from operating our mutual funds.

OK, so it’s not surprising that investors with busy lives to lead don’t know about Vanguard’s corporate structure. What is a bit surprising is that, even when investors patiently listen to and understand the explanation, they tend not to believe it.

Somebody at Vanguard has to be taking the profits out of the operation,” was the skeptical view.

I suppose folks have plenty of reasons to be skeptical about financial companies. But we really are client-owned.

No one, other than the funds and their shareholders, owns a piece of Vanguard. Nobody. Our CEO, Bill McNabb, and even our founder, Jack Bogle, are client-owners in exactly the way you are. We really are the only mutual mutual fund company.

So, why is this client-owned stuff so important? It’s important because that structure dictates everything else about Vanguard.

Because the clients, through the various mutual funds, own the enterprise, Vanguard operates at cost. Each fund pays a portion of Vanguard’s expenses—for salaries, facilities, computers, operating capital, etc. But the fund expenses don’t go to provide profits to an owner of Vanguard, because the funds are the owners. The funds and their shareholders keep the money that would go to profits at a typical mutual fund sponsor.

Thus client ownership leads to operating at cost, which leads to lower expense ratios for the funds. And lower expenses are important, because low costs keep more of your money working for you.

Even our investment philosophy flows from being client-owned. We advocate basic—even boring—investment principles like being diversified and balanced and taking a long-term perspective because we’ve found those elements tend to work.

It’s harder for investors with unbalanced portfolios to stick with a long-term investment program. An unbalanced portfolio—all stocks or all bonds or all cash—will perform well in certain conditions, then poorly in others.

If you’re working for your client-owners, you have no incentive to tempt them with investment concepts that may have sizzle but little substance. You have no reason to tout the returns of your hottest-performing funds, which sooner or later will cool off. You have every incentive to put the client-owner’s interests first, because there is no conflict with the interest of the investor who, through his or her fund shares, owns the mutual fund’s management company.

Once you understand the links—from client ownership to at-cost operations to low costs to an enduring investment philosophy—we hope it all makes sense. Even for the skeptics.


• All investments are subject to risk. Investments in bonds and bond funds are subject to interest rate, credit, and inflation risk. Diversification does not ensure a profit or protect against a loss in a declining market.

• Vanguard provides services to the Vanguard funds at cost. More information about Vanguard funds, including at-cost services, is available in each fund’s prospectus.