Since I have started investing I almost solely focused on Vanguard funds because of their great expense ratio and unique structure. Generally, having “all your eggs in one basket” is considered bad practice in the world of personal finance and investing so I wondered: What would happen if Vanguard fails?
The Vanguard Group Inc. (VGI) is owned in parts by each of Vanguard’s funds. The funds in turn are owned by the investors. This means that The Vanguard itself can only fail if all the Vanguard funds go bust which would essentially mean the end of the U.S. and world economy.
In this article, I’ll dive a bit deeper to really understand Vanguard’s company structure. We’ll look at how The Vanguard Group and its funds are set up and managed and who ultimately owns the company. I’ll tackle the question of FDIC insurance and explore how assets are protected in your Vanguard brokerage account.
In order to understand why it is basically impossible for Vanguard to fail, let’s first have a look at how the company is set up and structured.
Why Vanguard cannot fail
It is nearly impossible for the Vanguard Corporation to fail since all of its shares are held by the funds. And since the funds are owned by the investor in those funds the only way that Vanguard could fail is if the balance of all funds went to zero.
Let’s have a closer look at how Vanguard is structured to make it one of the safest and fail-proof brokers out there!
Vanguard’s corporate structure
Vanguard’s corporate structure is unlike that of any other major company. Think of any other major company, say GM and turn its corporate structure upside down. Then you’ll end up with something resembling Vanguard’s set up.
Clients who invest in Vanguard funds actually become shareholders and thus part-owners of that fund. Each fund is set up as a different entity. They share no connection to each other except all being part-owners in The Vanguard Group. This means that each investor is in full control of the entity he/she invests in.
The Vanguard Group, Inc. is a subsidiary of all funds and owned by them. VGI was created to manage the funds and complete administrative tasks. This is what the annual fee you pay as an investor is used for. In a way, VGI can be thought of as an external outsourced administrative service provider of Vanguard’s mutual funds and ETFs.
Who owns Vanguard?
Another unique aspect of Vanguard’s structure is that are no outside owners. In most other asset management companies the fees are not only used to cover the fund’s cost but also to generate a profit for the outside owner of the fund management company. Vanguard, on the other hand, operates at cost. There is no profit generation for third parties.
Since Vanguard itself is owned by the funds and the funds are owned by the individual shareholders, the investors are the true ultimate owners of Vanguard. How amazing is that!
What happens if Vanguard fails?
Since each individual fund operates as its own entity there is no way for Vanguard to fail in its entirety all at once. The question of whether each fund separately could fail and basically go to zero is one I have addressed in this post as well. In short, funds that hold a large variety of stocks could only fail and go to zero if all the companies in its holding went bankrupt.
As you can imagine, that is a highly unlikely scenario.
In theory, The Vanguard Group could fail since it is a separate entity as we have seen above. However, even if under some mysterious circumstances VGI would have to declare bankruptcy and go bust it would have no recourse to the money sitting in any of the funds.
VGI is only funded by the fees of each fund. All other assets are off limits.
So even if the highly improbable happened and Vanguard did fail, your money in the funds would be safe!
Is money in Vanguard Insured?
Another question I asked myself when researching this topic was whether the capital I put into a fund was insured or not. We all know about FDIC insurance when it comes to our bank accounts (usually up to $100,000). However, since FDIC insurance is only applicable to bank accounts, your assets in your Vanguard brokerage account are not insured under FDIC.
But there are other ways to be insured than FDIC:
Vanguard Brokerage Services which is a division of Vanguard Marketing Corporation is the company that holds your brokerage account funds in custody. This company, in turn, is a member of the Securities Investor Protection Corporation (SIPC). All members and the members’ customers funds are insured by the SIPC up to a value of $500,000.
And there is more…
Your money at Vanguard is additionally insured and protected through a partnership with Syndicates at Lloyd’s of London which offers a per client coverage limit of $49.5 million for securities and $1.9 million for cash. You can read more about their insurance policies here.
How reliable is Vanguard?
Now that we have looked at how Vanguard’s corporate structure works how your money in your brokerage account is insured, I’ll point out a few reasons why Vanguard is the most reliable company in my opinion.
Vanguard has a long history of trusting customers and investors and for a reason. In fact, Jack Bogle, the founder of Vanguard, actually issued and basically invented the first ever Exchange Traded Fund (ETF). Before that ETFs as we know them today did not exist.
When picking a reliable company to invest with ask youself: Do their values align with mine? What is there mission?
In their own words, Vanguard’s mission statement is “To take a stand for all investors, to treat them fairly, and to give them the best chance for investment success.”
Their entire company philosophy and structure was built to represent and reflect this mission. And you don’t just have to take their word for it. Vanguard’s funds operate at cost and the company is in fact owned by the investors. What more is there to say.
As mentioned before Vanguard does not only offer the standard insurance that all members of the SIPC enjoy but has secured additional coverage from Lloyds of London to insure investors’ funds up to almost 50 Million USD.
In summary, Vanguard – or The Vanguard Group, Inc. to be more specific – could fail. This scenario is very unlikely since VGI is directly funded by the individual funds which are set up as individual entities.
Their entire corporate structure makes it not only practically impossible to go bankrupt but also ensures that – if this did ever happen for any reason – the investors assets would be safe.
Vanguard’s entire company structure combined with their dedication to investors and their insurance coverage make it a very reliable partner in every investor’s journey.
I have chosen Vanguard as my primary fund management company.
What are your thoughts on Vanguard? Do you trust them?