Acquired
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.
02:47:51 · Ben Gilbert, David Rosenthal
[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. [02:48:05] S1: Yep. Yep. So that's the Fidelity story. The BlackRock story is different, but also rooted in ETFs, and in BlackRock's case, directly rooted in ETFs. So in 2009, during the depths of the financial crisis, BlackRock made a fantastic acquisition of a business called iShares Yeah. From Barclays, and this is all directly related to the crisis. So Barclays had acquired the pieces from a few different banks and financial firms, but really assembled iShares earlier in the decade. And iShares had become the leader in ETF issuance. When Barclays took over the failed Lehman Brothers assets, they needed to raise capital to shore up their capital base, and they had to put iShares up for sale as part of it. BlackRock came in and acquired it, and it has been just, like, a slam dunk, huge, huge win for them. Coming out of the financial crisis, you know what retail investors decided they liked even more than the Vanguard story and the simplicity and the folksiness of the Vanguard index mutual funds? They liked a lot of ETFs that they could trade on their own and make all sorts of Wall Street bets style fancy bets on the market. [02:49:37] S0: That's right. Because even Vanguard only has a few 100 funds and ETFs today, whereas BlackRock has tons of ETFs. Right?
02:49:37 · Ben Gilbert, David Rosenthal
[02:49:37] S0: That's right. Because even Vanguard only has a few 100 funds and ETFs today, whereas BlackRock has tons of ETFs. Right? [02:49:48] S1: Yes. 1,400 total ETFs. Like, really custom In aggregate totaling 3,300,000,000,000 in ETF assets under management, which is the largest player [02:50:00] S0: in the market by far. Across a bunch of different strategies and sectors and stuff that Vanguard has always been religiously against. [02:50:08] S1: Yes. Reluctant to pursue. [02:50:10] S0: Yeah. [02:50:10] S1: Yep. So, yeah, Vanguard is today the number two player in ETFs, but smaller both number of funds and then assets under management, and BlackRock continues to kinda accelerate away from them, which again, right now, the ETF market is smaller than the traditional mutual fund market that Vanguard still dominates. But the ETF market is still growing 30% every year, and BlackRock is starting to run away with it here. [02:50:37] S0: And BlackRock is also very diversified. Vanguard is a competitor with a slice of their business, but they're just in so many different sectors. [02:50:44] S1: Not to mention [02:50:45] S0: private assets. International. BlackRock is way more international than Vanguard is in terms of, the client base that they work with.
02:50:45 · Ben Gilbert, David Rosenthal
[02:50:45] S0: private assets. International. BlackRock is way more international than Vanguard is in terms of, the client base that they work with. [02:50:53] S1: Yep. Similar again though to the Fidelity strategy, BlackRock's profits elsewhere in the business allow them to subsidize the ETF business and just win massive amounts of clients. Yep. So all of this raises an interesting question here at the end of the story. Does Vanguard's no profit mutualized model actually hold it back today relative to Fidelity and BlackRock? When we started the process for this episode, Ben and I originally thought that the question of the episode was gonna be, how do Fidelity and BlackRock continue to exist at all despite Vanguard's, you know, obviously superior model? [02:51:40] S0: Right. And to put a finer point on obviously superior, it was with Vanguard undercutting them on price and being structurally incentivized by their shareholders to do so. Yep.