Vanguard reached $6 trillion in assets late last year. And it achieved that in the midst of an ongoing fee war with Schwab-TD Ameritrade, which continued last week.

Since the 2008 financial crisis, Vanguard has led the movement to lower fees across Wall Street, first by attracting hundreds of billions of dollars in index fund assets; then by cutting fees on thousands of exchange-traded funds in 2018, and last week, by announcing free online trading for all brokerage clients.

The latest move means that anyone with a Vanguard brokerage account can trade stocks for free. Vanguard has been commission-free on all of its mutual funds since 1977, on all Vanguard ETFs since 2010, and on nearly every ETF in the industry since 2018. (ETFs represent baskets of shares that trade like a stock). Additionally, more than 3,000 non-Vanguard mutual funds have no transaction fee when traded online.

The salvo is part of a broader, ongoing fee war with firms such as Schwab-TD Ameritrade, State Street, and BlackRock.

The fee war helps investors in the U.S. and globally, and furthers Vanguard’s reputation as the original low-cost provider. As of November 2019, the Malvern-based fund giant managed a record $6 trillion of investor money.

Here’s the context of the Vanguard-Schwab battle.

In the fall of 2017, TD Ameritrade changed its “no-transaction-fee” ETF platform, removing virtually all of the Vanguard funds, and inserting State Street funds instead.

This was an extremely disruptive change for financial planners and advisers at the time. Notably, Vanguard was not included in Schwab’s “no-transaction-fee" ETF platform.

In the summer of 2018, Vanguard fired back at TD Ameritrade and Schwab by launching a zero-commission ETF platform for virtually all ETFs.

“This was a direct hit at the ‘no-transaction-fee-but-still-pay-to-play’ platforms of Schwab and TD Ameritrade,” said Michael Kitces, director of research at Pinnacle Advisory and blogger at

Then this past fall, Schwab responded again to the Vanguard no-transaction-fee platform by going even more all-in on zero commissions, eliminating fees on ETFs, and also stocks.

Last week, Vanguard answered Schwab by matching its zero commissions on stocks, “because Vanguard was already zero commission on all the ETFs, having actually instigated that change in 2018,” said Kitces.

“I view this as simply another step in the back-and-forth of broker-dealer platforms," Kitces added, "like Schwab and TD Ameritrade trying to get money from asset managers for shelf space and distribution, Vanguard firing back at the industry by giving it away directly themselves, the industry responding by trying to undercut Vanguard, and Vanguard now responding again by matching the industry.”

Meanwhile, TD Ameritrade will be swallowed by Schwab, assuming the deal goes through.

Compared with Vanguard’s $6 trillion in assets -- $5.2 trillion excluding money market funds -- and 12,000 employees, Schwab manages $3.94 trillion, with 19,800 employees, according to Schwab data. And that’s before Schwab adds TD Ameritrade’s roughly 9,000 employees.

The fee-cutting wars have marked a huge win for Vanguard. In the span of a few years, Vanguard went from not having a zero-commission platform for ETFs, to getting virtually all major brokerage platforms to allow the purchase of Vanguard ETFs for no transaction fees, Kitces said.

Vanguard’s fee war has completely changed the landscape of how financial advisers and brokers charge fees.

“Vanguard has massive economies of scale, and that has given them some cost advantages over competitors. They have a simple business model," with fewer choices, said Lyn Alden Schwartzer, who operates a research platform out of Absecon, N.J.

“Their challenge now is differentiation going forward with multiple large competitors, offering similar products or a broader array of products,” she said, including rivals such as State Street and BlackRock.

“Lowering the cost of investing is business as usual for Vanguard,” said Karin Risi, managing director of Vanguard’s Retail Investor Group, in a press release last week.

Vanguard’s asset-weighted average expense ratio is 0.11% for mutual funds and 0.07% for ETFs, as of the end of 2018. Vanguard reduced expense ratios for 60 ETFs and mutual fund shares.

Vanguard has brokerage enhancements planned for 2020, including a new path for trades, an updated online experience, and a redesigned mobile app, the statement said.

How long can Vanguard continue the fee war?

“At some point, they can’t compete on price,” said Schwartzer. “Now, many competitors use low-cost index funds as loss leaders like Fidelity. These encourage investors to sign up for more expensive funds down the line.”

Brokerage firms “are becoming commodities,” continued Schwartzer, who uses M1 Finance to trade for her accounts (she’s paid by the company for her research and commentary).

M1 Finance technology lets customers manage some accounts based on percentages.

“When you put more money in, it allocates that money automatically with a blend of ETFs and stocks. That’s unique," she said. "In that sense, they and other robo-advisers are leapfrogging Vanguard in technology.”

Achilles’ heel

Vanguard’s legacy systems -- that is, its aging technology -- may be its only Achilles’ heel.

“Technology is critical to Vanguard and our clients, and as such we continue to make considerable technology investments across our businesses,” said Vanguard spokesperson Charles Kurtz in an email. “Technology is enabling the delivery of more scalable and comprehensive advice solutions.”

Personal Advisor Services has emerged as a leading advice service with $148 billion in assets, and Digital Advisor will be broadly available to all investors later this year, he wrote.

“Zero commissions for stocks and options is the natural next step in the evolution of our commission-free platform" he added. "Additionally, we offer a low-cost money market fund as the default brokerage sweep account, do not accept payment for order flow, and focus on best execution — in 2019, more than 95% of marketable orders for Vanguard ETFs were executed at the midpoint of the spread or better,” he said.

However, Vanguard’s website often generates error messages or is taken down for maintenance on heavy trading days, such as the last day of 2019.

October 2019 was a particularly bad month — with Vanguard sending errant 1099 tax form notifications and initiating withdrawals from clients’ accounts without permission, noted Dan Wiener, editor of the Independent Adviser for Vanguard Investors newsletter, and a follower of all things Vanguard.

Said one Vanguard customer on “I’m very appreciative of Vanguard’s leadership in cutting costs for investors. But let’s call a spade a spade: The IT is woeful and has been for a long time. Both the customer-facing side [the website] and the back end, which messes up cost basis and other basic things regularly. Customers of the brokerage operation (I’m no longer one) should demand better, rather than the excuse-making from some here -- ‘user error,’ ‘this is just one anecdote,’ ‘they have a lot of customers,’ ‘hey it keeps costs low.’ Low cost should not mean low reliability.”


Millennials could provide another challenge for Vanguard.

“Digitally native companies, smaller companies run by and for Millennials, connect with consumers and have tools to translate needs into actual products much faster,” said Gil Sadeh, CEO of Signals Analytics, an Artificial Intelligence company that mines consumer and other data for trends.

Millennials don’t yet have billions to invest, but they demand transparency and values-based products when they do, Sadeh added.

In one area, Vanguard has been deliberately neutral when it comes to values-based investing: disclosures surrounding political donations.

The “Big Three” institutional investors – BlackRock, Vanguard, and Fidelity – continued to oppose political disclosure resolutions put forth by public company shareholders. In contrast, the other institutional investor behemoth, State Street, increased its support over last year.

Of the 45 large-asset managers, only PIMCO supported 100% of political spending resolutions and 10 supported none.

“Political spending is widely recognized as posing an even greater risk in today’s hyper-polarized political environment,” said Center for Political Accountability president Bruce Freed. “It’s hard to understand why the Big Three institutional investors continue to resist this trend. Their obstinance puts companies – and their clients investing through them – at risk.”