Acquired
02:42:32 · David Rosenthal, Ben Gilbert
[02:42:32] S1: I think that's a fair characterization. [02:42:34] S0: Yeah. They, like, are primarily in different places in the value chain. And I'm revealing myself here, listeners, I have a Fidelity brokerage where I own mostly Vanguard funds. [02:42:43] S1: Yep. You and a lot of people. [02:42:45] S0: I think that's the common. Yep. [02:42:46] S1: Yep. Yeah. Well, okay. So let's take each of them in term, and may maybe let's start with Fidelity, and then we'll do BlackRock. So as we said throughout the story, Fidelity has always been very happy to experiment and invest in lots and lots of different things. And they have hit on two, like, real home run platforms in recent years, both of which are weak spots for Vanguard. So one is corporate four zero one k plans, as you foreshadowed earlier, Ben. [02:43:17] S0: Which is why I am a Fidelity customer. They got me when I started my first job at Microsoft, and I got my four zero one k there. And my employee stock plan also came through there. So then I opened my first Fidelity brokerage account, and that is how they've retained me as a customer for fifteen years.
02:43:17 · Ben Gilbert, David Rosenthal
[02:43:17] S0: Which is why I am a Fidelity customer. They got me when I started my first job at Microsoft, and I got my four zero one k there. And my employee stock plan also came through there. So then I opened my first Fidelity brokerage account, and that is how they've retained me as a customer for fifteen years. [02:43:35] S1: Well, and that's the other platform that has been a big home run for them, which is retail brokerage accounts. And as you point out, there is a natural crossover between those two things. So it all, I think, stems from a strategy that they realized a number of years ago. They don't necessarily have to compete with Vanguard anymore in the funds business. So even though Fidelity and Wellington slash Vanguard all started in the same business as fund managers, Fidelity realized, hey. We can, and and they certainly do offer their own index funds. [02:44:11] S0: Some of which are actually even cheaper. [02:44:12] S1: Yep. Some of which are even cheaper. They're loss leaders for them. But, like, we don't have to beat them there. Fidelity is very happy to have their four zero one k and brokerage account holders do what you do of just hold the Vanguard funds through ETFs. And I think Jack kinda foresaw this as as why he didn't like the the the business, opened up the Vanguard funds to being on all the other platforms. Mhmm.
02:44:12 · David Rosenthal, Ben Gilbert
[02:44:12] S1: Yep. Some of which are even cheaper. They're loss leaders for them. But, like, we don't have to beat them there. Fidelity is very happy to have their four zero one k and brokerage account holders do what you do of just hold the Vanguard funds through ETFs. And I think Jack kinda foresaw this as as why he didn't like the the the business, opened up the Vanguard funds to being on all the other platforms. Mhmm. [02:44:40] S0: Yeah. I mean, this is a I I don't know if it's an existential risk. I wouldn't say that. But this is a vulnerability for Vanguard, which is so many of their customers, of their AUM, don't actually have a relationship with the company. They are invested in Vanguard ETFs via their direct relationship with a different brokerage, primarily Fidelity. [02:45:04] S1: And that different brokerage, at least in Fidelity's case and in many of their cases, is also a competitor in the funds business. So right now, this is all fine. But if you play this out [02:45:14] S0: Well, it's it's fine because no one makes any money on the funds. So Fidelity doesn't have a huge incentive to say, you should come buy my two basis point fund over here instead of your three basis point fund over at Vanguard.
02:45:14 · Ben Gilbert, David Rosenthal
[02:45:14] S0: Well, it's it's fine because no one makes any money on the funds. So Fidelity doesn't have a huge incentive to say, you should come buy my two basis point fund over here instead of your three basis point fund over at Vanguard. [02:45:25] S1: Yeah. Your point is probably what will ultimately be correct is, like, the cost base cyst for these funds is so low already, it doesn't matter. But you could play this out years into the future where if this dynamic continues and Fidelity is able to make a lot of profits from all of their account holders in their other businesses, you know, four zero one k management, profits from companies for management fees there, and then retail brokerage through all the ways that they monetize retail brokerage. They could even, like, really undercut Vanguard on fund costs and and say, like, this is gonna be a total loss leader because we're just gonna profit in these other areas that Vanguard won't do.
02:45:25 · David Rosenthal, Ben Gilbert
[02:45:25] S1: Yeah. Your point is probably what will ultimately be correct is, like, the cost base cyst for these funds is so low already, it doesn't matter. But you could play this out years into the future where if this dynamic continues and Fidelity is able to make a lot of profits from all of their account holders in their other businesses, you know, four zero one k management, profits from companies for management fees there, and then retail brokerage through all the ways that they monetize retail brokerage. They could even, like, really undercut Vanguard on fund costs and and say, like, this is gonna be a total loss leader because we're just gonna profit in these other areas that Vanguard won't do. [02:46:03] S0: This is like Vanguard is Microsoft and Fidelity is Google, and they could launch Gmail and say that thing that's your primary business, we're gonna make that free now. And you have no other businesses to compete with us on because you don't have cash coming in from anything else. So sorry. Yep. The pushback is I don't think there's a difference between three basis points and zero basis points. If we go back to my example earlier of you throw a $100,000 in and the market compounds at 7%, and your fee is 0.03%, that is a difference at the end of the day of 1,480,000 and 1,497,000. So not a huge difference even forty years later of compounding. I don't think people are gonna switch over that.
02:46:49 · David Rosenthal, Ben Gilbert
[02:46:49] S1: Yep. Yep. There's another aspect to this too, though, which, your Gmail versus Outlook mail analogy is holds even more. Fidelity is just a better product and product experience than Vanguard. So during the pandemic, especially, it exposed that Vanguard's customer service and technology is, like, jank. It is not good, and there were a lot of horror stories of trades not going through, fund account transfers getting lost. And, like, it makes sense. Right? I mean, Vanguard, the downside of its structure is that there are no excess profits that can be invested for the long term in things like technology and things like customer service. Whereas Fidelity, as they started to realize that this strategy is gonna work for them, they said, oh, this is gonna be a weak spot for Vanguard. We're gonna double down on technology. We're gonna double down on customer service, and we're gonna make our brokerage platform and our four zero one k platform vastly superior to what Vanguard offers. [02:47:51] S0: Yep. It is an inherent trade off in the model. You don't have as much money in the kitty to build the best in class technology platform or the best in class customer service. You could, but you probably need to raise prices a little bit, and they just need to get comfortable with that.