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... their cost-saving structure is an unfair advantage, and that they owe taxes on those savings to the government. From what I remember, it's not about unfair

... their cost-saving structure is an unfair advantage, and that they owe taxes on those savings to the government. From what I remember, it's not about unfair advantages, but simply that they could have charged higher mutual fund fees, and thusly owe taxes on the fees they could have charged instead of the fees they actually charged.

Cerium 10y ago
Really? That makes no sense to me. Like it being wrong to work part time because you pay less taxes.
- tptacek 10y ago
  It is so much weirder than that. Vanguard's signature benefit is the way its organized: rather that a company that owns and manages funds, it's a collection of funds that own and share the management company. All of the expenses and overhead involved in managing the funds come directly out of the returns of the fund, so the company and its investors have aligned incentives. The problem is that the funds have a client/vendor relationship with the management company. Since the vendor is captive to the funds, it has no incentive to charge its clients market rates for its services. But since it's a separate taxable entity, it theoretically cannot gift (or discount) its services to its clients without the clients recognizing those benefits as taxable income. The "whistleblower" here is a former tax lawyer for Vanguard. Since Vanguard is basically one of the largest money managers in the world, that guy stands to make almost ten billion dollars in bounty fees if the IRS recovers based on his theory. As always, start with Matt Levine: https://www.bloomberg.com/view/articles/2015-11-25/calpers-fees-and-culture-consultants https://www.bloomberg.com/view/articles/2015-11-25/calpers-f...
  - Cerium 10y ago
    Thanks for the link, it was a good read.
  - klipt 10y ago
    But lower fees mean higher returns which means clients already pay more capital gains tax etc. Frankly if that's a tax loophole, then every credit union is in massive trouble. Not to mention restricted banks like USAA.
  - tanderson92 10y ago
    It's even wilder than that, because the former tax lawyer relied on a strange quirk of NY State Law which allows individuals to sue on behalf of the state. That is, the suit was titled "State of New York ex rel David Danon v. Vanguard Group, Inc." note the ex rel -- it wasn't a personal suit against Vanguard ! This case was utterly bizarre and completely fascinating; the Bogleheads forum have perhaps the most informed discussion on the internet of this case: https://www.bogleheads.org/forum/viewtopic.php?t=143686 https://www.bogleheads.org/forum/viewtopic.php?t=143686

Cerium 10y ago

Really? That makes no sense to me. Like it being wrong to work part time because you pay less taxes.

tptacek 10y ago
It is so much weirder than that. Vanguard's signature benefit is the way its organized: rather that a company that owns and manages funds, it's a collection of funds that own and share the management company. All of the expenses and overhead involved in managing the funds come directly out of the returns of the fund, so the company and its investors have aligned incentives. The problem is that the funds have a client/vendor relationship with the management company. Since the vendor is captive to the funds, it has no incentive to charge its clients market rates for its services. But since it's a separate taxable entity, it theoretically cannot gift (or discount) its services to its clients without the clients recognizing those benefits as taxable income. The "whistleblower" here is a former tax lawyer for Vanguard. Since Vanguard is basically one of the largest money managers in the world, that guy stands to make almost ten billion dollars in bounty fees if the IRS recovers based on his theory. As always, start with Matt Levine: https://www.bloomberg.com/view/articles/2015-11-25/calpers-fees-and-culture-consultants https://www.bloomberg.com/view/articles/2015-11-25/calpers-f...
- Cerium 10y ago
  Thanks for the link, it was a good read.
- klipt 10y ago
  But lower fees mean higher returns which means clients already pay more capital gains tax etc. Frankly if that's a tax loophole, then every credit union is in massive trouble. Not to mention restricted banks like USAA.
- tanderson92 10y ago
  It's even wilder than that, because the former tax lawyer relied on a strange quirk of NY State Law which allows individuals to sue on behalf of the state. That is, the suit was titled "State of New York ex rel David Danon v. Vanguard Group, Inc." note the ex rel -- it wasn't a personal suit against Vanguard ! This case was utterly bizarre and completely fascinating; the Bogleheads forum have perhaps the most informed discussion on the internet of this case: https://www.bogleheads.org/forum/viewtopic.php?t=143686 https://www.bogleheads.org/forum/viewtopic.php?t=143686