Comment by tptacek | Hacker News Reader

Comment by tptacek | Hacker News Reader

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Bogle is remembered primarily for his role in launching index funds, but I think a more telling part of his legacy is the structure of Vanguard, the firm he started, now the world's most trustworthy (and among the very largest) investment firms.

Unlike most firms, Vanguard's funds own the firm, rather than the other way around. The funds are owned by Vanguard's customers, who transitively own the company. Vanguard "pays cost" for all the work its management and staff performs.

To illustrate how powerful this structure is, see Matt Levine's writing about "the fake moon landing of financial news stories": a claim by a former Vanguard insider that the savings accrued to the funds (and thus customers) as its result constitute billions of dollars of taxable income (under the IRS whistleblower rules, some percentage of those taxes would go to the insider!):

https://www.bloomberg.com/opinion/articles/2015-11-25/calper...

Bogle is a giant and a good guy in a field not packed full of good guys. RIP.

Followed the link to read about the taxes, but the framing doesn't make sense to me:

The Vanguard Group is a mutual fund company whose adviser is owned by the funds, rather than being an independent profit-seeking corporation, so it can charge its funds lower advisory fees than its competitors do. (Disclosure: I am a Vanguard investor.) But the adviser is a taxable corporation, while the funds themselves are not taxable (they just pass through taxes to investors). There is a theory that the adviser should be charging Vanguard higher management fees, to reflect the "arm's length" prices that an independent adviser would charge, rather than the "at-cost" prices that it does in fact charge. Or rather, there is a theory that Vanguard owes taxes on the fees that the adviser should have charged, which would have been profit to the taxable corporation.

Why is there any fee that "should" be charged? The premise seems flawed that fees need to anything more than cover costs to pay the employees to do their work.

"If this structure were different, they'd charge more and make a profit and pay tax" ... But it's not different, so it doesn't make a profit, so it doesn't pay tax. Pretty simple.

It depends on how well established the market price is. If I sell you a $300k house for $150k, I've given you $150k of value. I'm either incompetent or purposefully gifting you $150k. There's a price that should be charged based on similar houses.

If I do that on behalf of a company by selling THEIR house, I'm either incompetent or embezzling money. If it turns out I sold it to a friend, it's clear I was embezzling. If I don't know the person (i.e. "arms length") I'm just incompetent.

In this case there is a market price for advisory services that you can figure out by looking at all the other similar advisers out there. You could make the argument that there are not enough similar advisers to establish what the price "should" be, or that it's not sufficiently below them to establish how much of a discount there is.

But mainly no one cares to go after the 401(k) balances of millions of middle class Americans on a technicality, so it's a non-starter.

Well, almost no one does, but someone has filed a whistle-blower claim with the IRS that this pricing arrangement is an illegal tax dodge: https://www.nytimes.com/2016/02/07/your-money/vanguard-a-cha...

It seems as though that case is still pending resolution.

I disagree with it, but the concept of "imputed rent" and "Home-Ownership Bias" is similar: https://en.wikipedia.org/wiki/Imputed_rent

> "More formally, in owner-occupancy, the landlord–tenant relationship is short-circuited. Consider a model: two people, A and B, each of whom owns property. If A lives in B's property, and B lives in A's, two financial transactions take place: each pays rent to the other. But if A and B are both owner-occupiers, no money changes hands even though the same economic relationships exists; there are still two owners and two occupiers, but the transactions between them no longer go through the market. The amount that would have changed hands had the owner and occupier been different persons is the imputed rent."

> "The government loses the opportunity to tax the transaction. Sometimes, governments have attempted to tax the imputed rent (Schedule A of United Kingdom's income tax used to do that), but it tends to be unpopular. Some countries still tax the imputed rent, such as Iceland, Luxembourg, the Netherlands, Slovenia and Switzerland. The absence of taxes on imputed rents is also referred to as Home-Ownership Bias."

If the owner-occupier can be taxed for inputed rent, then the owner-occupier should also be able to depreciate and expense every blasted cent put into any expense whatsoever made in connection with the property.

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