How do you know you can trust Vanguard (or any brokerage)?

[trashmanz]

Was reading through the Simple Path To wealth book from http://jlcollinsnh.com and was thinking about the section about Vanguard being trustworthy because all they do is hold stocks not your money or something to that effect. 

But really how can you truly know/guarantee that your money is invested where they say it is?  Unlike a bank account, there is no FDIC insurance?  Nowadays we don't get stock certificates to hold like our grandparents would, and how would that even apply to an index fund much less their in house mutual funds?

For example, what would happen if Vanguard completely disappeared tonight, never to have any paperwork come out of it?  Is there any other record of our ownership in the assets they say they have?  Also couldn't (although it is unlikely) the books be "cooked" in a way like Madoff said that money is invested in a fund, but really not invested where it said it is? 

[Frankies Girl]

Just like how banks are backed (up to 250K per account held) by FDIC insurance, investment companies like Vanguard and Fidelity are covered by Securities Investor Protection Corporation (SIPC) insurance in the event that the company goes under.

http://www.sipc.org/

Here's a decent explanation on Fido's site as they cover above the standard SIPC limits:

https://www.fidelity.com/why-fidelity/safeguarding-your-accounts

You have to rely on these type of companies be composed of mostly honest employees and that they have adequate oversight. You do your homework and research, and go with the company that you can find good information for and ultimately trust in their track-record and amount of satisfied customers.

If you're so freaked out that there are no records or stock certificates, you can request monthly statements by mail, or download them off their websites and save in your computer. Would be something anyway that might help you feel better about having concrete proof of your funds and how much/where they are.

I personally don't believe a company that has been in business as long as places like Vanguard and Fido will suddenly turn shady and steal all my money. Even if someone at the company DID do that, they'd restore every penny as soon as the fraud was discovered, and the SIPC would indemnify you if the entire company suddenly turned evil and shut down overnight, so you'd still eventually be made whole. But the idea that something like that happening is honestly in the realm of "ice skating party in hell" time - serious level tin foil hat wearing paranoia in my opinion. ;)

There is the nuclear/zombie apocalypse scenario, in which case likely unconcerned as much with the state of our investment accounts as much as wondering where we'll hide from the undead/nuclear fallout.

Otherwise, you're welcome to pull out all your money as gold bullion and bury it in the backyard... ;)

[trashmanz]

Thanks for the reply.  So Madoff was able to screw people because it was a hedge fund and not an investment company covered by SIPC?

[protostache]

Also keep in mind that the stocks that the mutual fund holds for you don't actually live at that company. By law mutual funds have to use a third party custodian. Vanguard uses JPMorgan Chase.

[nereo]

Thanks for the reply.  So Madoff was able to screw people because it was a hedge fund and not an investment company covered by SIPC?

Short answer: yes.  Private hedge fund managers have a lower level of scrutiny, and Madoff routinely sold holdings just before the filing deadlines so that he would not have to report those gains/losses.  There was literally no way of knowing what investors with Madoff were invested *in* at any given time.
In contrast, with a Vanguard or Fidelity fund you know precisely what you are holding, and you can verify performance yourself if you really don't believe them (though with popular indexes like the SP500 there's no need, since that's reported independently on a continuous basis). Brokerages are required to file quarterly reports (the 10Qs) listing in explicit detail the fund's holdings, and what has been bought and sold in what porportion and when.  It's pretty dry material but it's all there for anyone (even people who aren't clients) to download and read.  Plus of course the SEC is charged with oversight, so while that's not perfect it is useful.

[MustacheAndaHalf]

Just like how banks are backed (up to 250K per account held) by FDIC insurance, investment companies like Vanguard and Fidelity are covered by Securities Investor Protection Corporation (SIPC) insurance in the event that the company goes under.

SIPC protection did not save Madoff's investors from ruin according to this wiki entry:
"In the Madoff fraud where securities had allegedly not actually been purchased, SIPC and the SIPC Trustee challenged and disposed of the claims of approximately one-half of customers of the Madoff firm, arguing that over the course of time those investors had withdrawn more funds than had been invested, resulting in a negative "net equity", and therefore, not eligible for SIPC protection"
https://en.wikipedia.org/wiki/Securities_Investor_Protection_Corporation#Caveats_and_clarifications

I personally don't believe a company that has been in business as long as places like Vanguard and Fido will suddenly turn shady and steal all my money.

Picking solely by years would actually favor Madoff Investment Securities (founded 1960) over a company that started ~16 years later (Vanguard's S&P 500, created 1976).  I've even seen Madoff's trading symbol in an old textbook showing sample market orders, so even reputation might not provide safety.


The one thing I've read appears in 100% of fraud cases is the fraudster both makes investment decisions and holds the assets.  If another party holds the assets, while the portfolio manager just makes decisions, the portfolio manager can't steal the assets.  They simply don't possess them - they just issue buy / sell orders.  Being able to verify the fund management does not have possession of the fund's assets is an important anti-fraud measure.

[Aphalite]

protostache and MustacheAndaHalf have it right

The way to prevent fraud is to insist on a reliable third party custodian - Madoff's custodian was "Bernie Madoff Securities" - not the warmest fuzzies

[triangle]

If you think about it our society and institutions are all built on a foundation of trust, backed up by laws. Do those numbers in your bank account really exist, will the auto insurer honor and pay a potential claim, was the high rise building you may live in or work in built and maintained up to proper safety codes??? Trust should be earned through prior actions but a good degree of faith is still required. This is why the respect for law (including contracts) and their enforcement is key to the functioning of our modern society - IMO.

[BarkyardBQ]

Did you read his Stock Series?

http://jlcollinsnh.com/2012/09/07/stocks-part-x-what-if-vanguard-gets-nuked/

2.  Why are you comfortable having all your assets with one company?  Isn’t this what tanked investors with Bernie Madoff?

Because my assets are not invested in Vanguard.  They are invested in the Vanguard Mutual Funds and, thru those, invested in the individual stocks, bonds and REITS those funds hold. Even if Vanguard were to implode (a vanishingly small possibility), the underling investments would remain unaffected. They are separate from the Vanguard company.  As with all investments, these carry risk, but none of that risk is directly tied to Vanguard.

Now this can start to get very complex and for the very few of you who care, there’s lots of further info you can easily Google.  For our purposes here, what’s important to know is:

1.  You are not investing in Vanguard, you are investing in one or more of the mutual funds it manages.

2.  The Vanguard mutual funds are held as separate entities.  Their assets are separate from Vanguard, they each carry their own fraud insurance bonds, each has its own board of directors charged with keeping an eye on things.  In a very real sense, each is a separate company operated independently but under the umbrella of Vanguard.

3.  No one at Vanguard has access to your money and therefore no one at Vanguard can make off with it.

4.  Vanguard is regulated by the SEC.

[Mighty-Dollar]

Vanguard is merely a holding company through which you invest in publicly traded securities.

Madoff's Ponzi scheme was private equity. Not traded on the stock market. No ticker symbol. Not tightly regulated like publicly traded securities.

[chasesfish]

Thanks for the reply.  So Madoff was able to screw people because it was a hedge fund and not an investment company covered by SIPC?

That's kind of the situation.   There have been numerous examples of fraud over the course of investing in the past and there will probably be some that happen in the future  The best thing you can do is look at the entire story of the investment firm or company you're using and determine what is the probability:

Vanguard, Fidelity, ect:  Very large in assets under management, audited financial statements and changes auditors, transparency in their holdings, long history in business, multiple executives with industry experience, operate inside multiple, highly regulated lines of business (Investments, but also insurance and banking), SPIC claims

Madoff:  One line of business, owned by 1-2 people, did not disclose audited financial statements, only one regulatory body, took large investments above the SPIC limits
Enron:  Single business, single regulatory body, auditors did not catch the fraud and always used the same firm.