The Company That's a Bigger Threat to Wall Street Than Occupy
The people having the most success destroying the Wall Street elite these days are not bomb-throwing anarchists. They are buttoned-up investment types who are just less greedy.
Traditionally, the Wall Street investment industry has grown rich by skimming off a portion of the astronomical amount of money that passes through its hands. In exchange for moving money here and there and everywhere for investors, Wall Street would take a little fee. And even a fee that sounds subjectively small—one percent? Less?—adds up to many billions of dollars when it’s applied to a pool of investments in the trillions.
Over the years, though, research made it increasingly clear that the people you paid to tell you where to invest your money really had no idea if their advice was good or not. No idea! The advice was actually, in fact, worthless! And so people who paid high fees on their investments inevitably, over time, make less money than people who pay low fees. It also became clear that very few people can successfully pick winning stocks, so it is better for most people to just invest in everything and leave their money alone. These were the founding ideas of Vanguard, an investment group which provides very low-cost index funds, and is owned by its investors, meaning it lacks the insatiable profit motive of the big banks.
Today, Vanguard has grown so huge that with every passing year it sucks more and more away from higher-priced traditional Wall Street funds, as more and more people sit down and do the math on how much they are paying for a service that amounts to nothing. Bloomberg tallies up what Vanguard is actually costing the rest of Wall Street:
Vanguard’s assets now stand at $3.1 trillion, which effectively means that this year alone it will have removed more than $16 billion from the financial industry just through fees. That figure is based on the average asset-weighted fee of a Vanguard fund of 0.13 percent, compared with the 0.66 percent average asset-weighted fee of an active mutual fund...
Until now, the asset numbers probably weren’t big enough to trouble Wall Street, but as Vanguard is now on pace to add a cool $1 trillion in assets every few years, it is effectively becoming a massive wealth transfer machine funneling money out of the financial industry and into individual investors’ accounts.
To add a bit of perspective, Goldman Sachs’ investment management business brought in $6 billion in profits last year; JPMorgan Chase earned a total net income last year of close to $22 billion. Vanguard, simply by offering less greedy prices for its services, is in effect accomplishing the same thing that a tax on Wall Street that was then refunded to investors as a tax credit would accomplish.
It is kind of neat that the biggest existential threat to a fundamentally corrupt business model is just another business that decided to rip people off less. Who would have thought?
Waving signs outside of Goldman Sachs headquarters while playing a drum with a black bandanna tied around your face is still good. We all have a part to play. Just remember, Occupy Wall Street soldiers, that your most effective ally is a bunch of paper pushers in Malvern, PA.