Investment funds like Vanguard make their money from customers through several mechanisms. Here’s a detailed breakdown:
Vanguard charges a management fee, which is a percentage of the assets under management (AUM). This fee compensates the fund managers for their services. The fee is typically expressed as an expense ratio, which might be as low as 0.03% for some index funds and higher for actively managed funds.
The expense ratio includes various operational costs such as administrative expenses, compliance costs, and marketing fees. It is deducted directly from the fund's assets, reducing the returns to investors proportionally.
For services like Vanguard Personal Advisor Services or Vanguard Digital Advisor, Vanguard charges an advisory fee. This fee is typically a percentage of the assets managed under these advisory services.
While many Vanguard funds have no transaction fees, some funds and brokerage services may charge transaction fees. These could include fees for buying and selling funds, as well as for certain brokerage transactions.
These are fees charged for various services provided to shareholders, such as customer service, account maintenance, and record-keeping. They are often included in the expense ratio.
Although Vanguard is known for its low-cost funds and often does not charge 12b-1 fees, some funds in the industry charge these fees to cover the costs of marketing and distribution of the funds.
While less common for Vanguard due to its client-owned structure, some investment funds generate revenue through agreements with third parties, such as financial advisors or brokers, who may recommend the funds to their clients.
Some Vanguard funds participate in securities lending, where they lend out securities held in the fund to other financial institutions for a fee. The revenue generated from securities lending is shared between the fund and the management company.
Vanguard also earns money from the interest on uninvested cash held in customers' accounts, similar to how banks earn interest on deposits.