[rayiner]

Your analogy hits a snag here:

> In the meantime, the co-op grows 10-fold, but the contract with the management company doesn't change (somehow, let's just assume the co-op doesn't require active management, they just need guidance occasionally or something)

The question isn't what a "normal management structure" would cost. It's what the affiliated entity would normally charge in the market for the same service. Vanguard's sells its investment management services to the mutual fund at cost because it's owned by the mutual fund. It wouldn't do that otherwise.

So to make your example comparable, the co-op buys the management company, and makes it operate at zero profit. So the question is: would the management company be happy making zero profit if it weren't owned by the co-op? The answer is: probably not.

[jrock08]

So, I'll admit that I don't understand the details of how vanguard is paying employees or the external people that actually manage the money, but presumably, they pay a fixed fee to someone to manage the money, and that fee is significant (but not a significant fraction of the money under investment). The fact that "normal" in investment funds is percentage of money under investment plus percentage of the profit shouldn't matter since they've found a way to run a company that doesn't need to pay those fees to get the money invested.

edit: I should add, that I'm fairly certain that the employees at vanguard are in fact getting paid.

edit2: So the question is should we look at whether the employees/contractors at vanguard are getting paid market rate, or whether vanguard as a whole is charging market rate to the investors. My comparison to the hospital co-op was that it's unfair to compare apples-to-orangutans.

[kspaans]

But isn't one of the points of Vanguard that their investment management is cheaper by its very nature? Namely: passive, index-tracking funds are simpler and cheaper to manage than active ones?

I can see that they could have run afoul of some tax rules due to their structure, but it seems disingenuous to argue that they should charge management fees just as high as their active management competitors. (But sure, maybe they should charge more than they do now.)

Then again, as an owner of Vanguard index funds, maybe it's hard for me to be rational in this case. >:D