Over the last few years, I’ve had accounts at just about every brokerage firm you can name–Schwab, Fidelity, Vanguard, ETrade, Scottrade, TradeKing, and a whole list of others.*
And over the last year, I’ve consolidated everything at Vanguard.
To be clear, Vanguard is not the only reasonable choice. Low-cost, diversified portfolios can be built just about anywhere these days. So, while my own portfolio consists of Vanguard index funds, I’d be perfectly happy with this portfolio of commission-free ETFs at Schwab, for example:
- Schwab U.S. Broad Market ETF
- Schwab International Equity ETF
- Schwab Short-Term (or Intermediate-Term) U.S. Treasury ETF
…or this index fund portfolio at Fidelity:
- Spartan Total Market Index Fund
- Spartan International Index Fund
- Spartan Short-Term (or Intermediate) Treasury Index Fund.
So Why Do I Use Vanguard?
I prefer Vanguard because of their unique ownership structure. You see, Vanguard is owned by the mutual funds it runs. (This is in contrast with other brokerage firms and fund companies, which are owned by third-party shareholders.)
Believe it or not, this isn’t just trivia. It has important ramifications.
First and most obviously: It makes their funds very inexpensive. All of Vanguard’s services are provided “at cost” to investors. And why wouldn’t they be? The investors essentially own the company.
Cost Reduction (rather than Profit-Maximization)
Second, it means that Vanguard is always looking for ways to reduce costs even further. Contrast this with other brokerage firms, and you see a big difference.
For example, discount brokerage firm Zecco became known for offering commission-free trades to people with accounts of $25,000 or more. They recently announced, however, that they’re ending that program completely. Tough luck to everybody who opened accounts for exactly that reason.
With Vanguard, you don’t have to worry about bait-and-switch tactics like that. You don’t have to worry about them roping you in with a low-cost promotion, then jacking up prices to increase their profit margin (because, again, there is no profit margin).
Elimination of Conflicts of Interest
Finally, Vanguard’s unique ownership structure means that the information investors receive from them is not polluted by conflicts of interest.
As a contrasting example, with my account at Schwab, I frequently received emails (as well as their quarterly On Investing publication) that encouraged me to seek above-market returns by trading individual stocks or selecting actively managed mutual funds. I daresay it’s not a coincidence that frequently trading stocks and investing in high-cost funds happen to be strategies that are more profitable for Schwab than buying and holding index funds.
My experience was similar with other brokerage firms: They consistently encourage their clients to use investment strategies that are most profitable for the brokerage firm, regardless of how likely those strategies are to be successful for the investor.
At Vanguard, it’s different. I don’t agree with every piece of information they put out, but at least I don’t have to worry that they’re trying to get me to do something just because it’s more profitable for Vanguard.
*I do not recommend having accounts at several places. I did it for business purposes — so that I could write intelligently about several different companies — rather than investment purposes. As an investment decision, it makes little sense.