Can Vanguard Go Bankrupt? And What Happens To Your Money If They Do

It’s important to understand what will happen to your money should the worst happen.

In this case, we’ll be looking at what happens to your money if Vanguard the largest provider of mutual funds, and the second-largest provider of exchange-traded funds go bankrupt.

It’s very unlikely that Vanguard will go bankrupt due to the way in which they’ve structured the businesses.

However, if 2008 taught us anything, it’s that the impossible can happen. Luckily, if Vanguard did happen to go out of business your money is safe as you’ve not invested in Vanguard, instead, you’ve simply used them as the broker.

There’s a lot to understand when it comes to Vanguard (and the money you invest using their services) as they are unlike any other investment firm.

You should be sure to understand how they operate and how that differentiates with other investment companies before deciding how and where to invest your money.

Can Vanguard Go Bankrupt

You’ve probably heard people exclaim that it’s impossible for Vanguard to go bankrupt. However, like all things after the 2008 market crash, it’s hard to believe. Because if there’s one thing that time in history taught us, it’s that anything really is possible.

However, Vanguard was built different which is why everyone (for the most part) is so confident that bankruptcy is extremely unlikely.

Vanguard is owned by its clients and as a result, operating at-cost (right now these costs are around 0.11% compared to the 0.57% industry average).

This means that when you invest in Vanguard funds you and the people at Vanguard get in a boat together. You’re one and the same. A team!

Once you invest in Vanguard Funds you kind of become one of the owners of Vanguard.

This differs when compared to traditional banks, brokers, and investment firms who are owned either privately (by a single person or family) or publicly (traded on the stock market).

In either of these cases, the owners expect a return on their investment. This is generated from the profits of the company which is generated from the income in operating fees charged to the investor (that’s us) minus the operating costs (gas, electric, rent, IT equipment, salaries etc.)

Therefore when you take out a fund using a public or private company the fees you’re charged include both the operational costs and some profit which will be given to the owners of the company (the shareholders or the single-family owners)

This is also why you’ll find the fees for trading with these companies are often significantly higher than Vanguard.

With no third party influence (such as shareholders) and by claiming the exact expenses required to run the business from those investing in the fund’s people believe that it’s highly unlikely Vanguard will ever go bankrupt.

What Happens To Your Money If Vanguard Go Bankrupt

However, for argument’s sake, let’s assume that Vanguard did go bankrupt or decided to completely stop trading. They simply fell off the face of the earth. What would happen to your money?

No investment is entirely safe, so even if you think there’s a teeny, tiny chance of it happening you should consider what would happen to your money as a result. This is why it’s always important to speak to a licenced financial advisor (I am not a licenced financial advisor) who can help you with these decisions.

In this case, as the money is not invested in Vanguard specifically and instead invested in Vanguard funds which are made up of individual stocks, bonds, and REITs of other companies.

The number of businesses and the type of businesses varies between different funds and often depends on the aggressiveness of your investment fund. This is one of the things which makes investing in an index fund favorable over a single stock.

My money is with all the tiny businesses, and not with Vanguard. So, even if Vanguard disappeared altogether, my money wouldn’t.

You’re using Vanguard as the brokerage, even when investing in the index funds that Vanguard puts together. They charge a fee (which directly aligns with their operating costs of the fund) when you make a transaction.

So, even if Vanguard did close, the money would still be yours.

Of course, this isn’t the only thing to consider when looking to invest in index funds or specifically Vanguard index funds. Like all investments, you should speak to a licenced financial advisor.

I am not a licensed financial advisor, I’m just a huge fan of money. For this reason, I am not responsible for any decisions you make as a result of reading this article or any other article on Frugal Expert.

Is There A Benefit To Having Multiple Broker Accoutns For Funds?

One solution to mitigate any risk when investing is to diversify your brokerage and management funds account the same way you would your index funds and investment portfolio.

This is totally legal and allows you to mix and match the benefits of each service depending on the investments you’re looking to make.

While the majority of brokers have access to major index funds and ETFs only some permit trading of cryptocurrency, penny stocks, and forex. Therefore if you’re wanting to invest in these you’ll need to find a broker that offers this service.

You’re only covered by the SIPC if you’re brokerage account remains under $500,000. You can split your money between multiple different brokerages to ensure that the coverage is met at each location.

For example, if you’ve $2 million to invest you could do $500,000 across 4 different brokerage sites to ensure you’re not going over the cap at any one location.

Then, of course, there’s the benefit of reduced and promotional fees. Over the past 5 years, we’ve seen somewhat of a price war among online brokers.

You can, therefore, benefit from promotional or reduced fees by opening up an account with that broker but not shifting all your investments to them entirely.

There are of course some drawbacks to opening multiple brokerage accounts. These include;

  • Increased risk of identity theft.

  • You could forget about one (or more) of the accounts – sounds crazy, but I know people who’ve done it.

  • You may not reach a premium or value level with any single broker and therefore miss out on free advisors etc.

  • You’ll have to manually track your investments over multiple portfolios to see your entire position.

Again these are all things that your personalized financial advisor should be able to help you with.

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