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Vanguard’s brokerage customers may be getting a New Year’s gift. The company is expected to announce soon that it is eliminating commissions to trade equities and options.

Free trades would be an abrupt shift by Vanguard Group. Only a few weeks ago, CEO Tim Buckley had waved off the idea of cutting commissions, a move every other discount broker made in October. “We go for a different investor,” he told Barron’s in mid-November. “We’ve made the choice not to provide all the services for people who want to churn and burn their account.”

It’s a measure of how rapidly the industry is changing that its leader is playing catch-up on pricing.

Vanguard built itself into one of the world’s largest fund companies on the back of low-cost investing. It has become a feared competitor, taking 70% of the fund industry’s net sales since 2014 and racking up more than $5.7 trillion in assets under management. In 2018, Vanguard took a stunning 97% of the entire fund industry’s net sales. No one comes close to Vanguard’s scale. It can drive down the economics of everything it touches.

Yet its castle is now under siege. Its low-cost advantage is being eroded by advances in technology, industry consolidation, and heightened competition. Index funds are so inexpensive across the industry that Vanguard’s prices are no longer the lowest. Vanguard’s brokerage platform lacks innovative tools and features, and the firm has suffered a series of embarrassing technology glitches.

Competitors are circling. Among the major brokers, Charles Schwab (ticker: SCHW) led the way in eliminating equity commissions in October. Schwab, State Street (STT), and BlackRock’s (BLK) iShares exchange-traded funds match or beat Vanguard’s pricing. Schwab’s “robo” exchange-traded fund service costs nothing in annual fees while Vanguard charges 0.3% for a similar service, although it comes with a financial advisor. (Schwab offers planning for a $30 monthly advisory fee.)

Critics say Vanguard needs an adrenaline shot of innovation. “They suffer from a bit of hubris,” says Steve Lockshin, an investment advisor who worked on a Vanguard advisory council to explore new technologies. “When you have the success they’ve had, it reinforces the notion that you’re smarter than the other guys, and hubris can kick in.”

Some hubris is warranted: Vanguard has done more to change the fund industry for the better than any other firm. Company founder Jack Bogle set out to make investing accessible to everyone, eliminate friction from high fees, and develop products that captured the market’s returns—a model that proved wildly successful and forced other companies to follow.

Buckley disputes the notion that Vanguard is no longer a price leader and lacks innovation. “When you come to Vanguard, you don’t have to worry about low cost,” he says. With fees averaging 0.1% on an asset-weighted basis, Vanguard charges far less than the industry average of 0.58%.

And the company is investing more than $1 billion a year in technology, Buckley says. It has launched several mutual funds and ETFs in recent years. Its managed-portfolio business has racked up $148 billion in assets since 2015. The company plans to roll out a lower-cost robo called Vanguard Digital Advisor in 2020. Vanguard is also expanding internationally, aiming to bring its brand of low-cost indexing to Europe, Asia, and other regions where fees remain high.

Nonetheless, Vanguard is facing stiffer competition and tough questions about its future. Index funds were always a commodity. But with U.S. fund fees heading to zero (already the case at Fidelity), it is getting tougher to distinguish a Vanguard product from the competition. Vanguard can count on an enormous asset base for growth, but it has fallen behind in areas like brokerage and advisory services. The planned merger of Schwab and TD Ameritrade Holding (AMTD) will create a megarival that will likely challenge Vanguard’s pricing and customer base even more.

How will Vanguard contend against these forces and fare if the indexing wave that fueled its rise starts to taper off? The company has answers, of course. But Vanguard clams up when it comes to another question: How much does it actually make and give back to investors—which, because of its structure as a mutual company, are the fundholders themselves? Buckley and other executives declined to disclose any details about Vanguard’s revenue, profit, or taxation. Vanguard’s finances are a black box.

Is Vanguard really wobbling?

It seems crazy to even ask. This is a company, after all, that went from an industry gadfly—given patronizing, then grudging, respect—to one that strikes fear with its capacity to drive down prices and scoop up assets.

Since 2008, Vanguard has doubled its share of the fund industry’s net sales, going from 15% to an average of 30%, according to John Rekenthaler, vice president of research at Morningstar. Vanguard took in $1.2 trillion in net new money in the past five calendar years, compared with $500 billion for all other fund companies combined, Rekenthaler says. Much of its growth has come from index funds, but Vanguard is also the third-largest manager of actively managed mutual funds, with $1.1 trillion in assets at the end of November, behind American Funds and Fidelity.

In the retirement market, Vanguard has become an immovable force. The firm administers more than 1,900 retirement plans with $1.4 trillion in assets, and employers have seeded many of them with Vanguard target-date funds, the default investment in most plans. Vanguard’s $500 billion in target-date funds accounts for 39% of the market, nearly double the assets its next-closest competitor, Fidelity, at 20%, according to Morningstar Direct.

All of this makes for quite the success story. When Bogle founded Vanguard in 1975, active managers were paid handsome sums to outperform. Index investing was viewed as a quirky academic idea, bordering on socialism; the notion that investors could do better in the long run by matching the market, rather than trying to beat it, seemed almost un-American.

Bogle convinced investors they had the best chance of success by keeping costs down, holding for the long term, and avoiding complex products. He wasn’t opposed to active management—Vanguard began as an all-active shop with 11 funds, including Wellington (VWELX)—but it had to be low-cost to be competitive.

Vanguard became synonymous with homespun investing—a safe place you would recommend for a college savings account or your grandmother’s retirement. Bogle’s wisdom inspired millions to send in checks, including superfans known as Bogleheads, who make a pilgrimage to Vanguard’s campus every year. The 300-acre headquarters in Malvern, Pa., a Philadelphia suburb, is a testament to Bogle, who died in January and was known as Saint Jack, albeit sardonically to some. There’s a statue of him in a grassy area and nautical themes everywhere, like the ShipShape gym and Morgan Galley cafeteria, reflecting his love of naval history.

Bogle wasn’t just beloved because he preached the gospel of index funds. His other legacy was setting up Vanguard to put clients first and money back in their pockets. He scrapped the industry practice of charging sales commissions on funds. And he structured Vanguard as a mutual company, owned by its fund shareholders, similar to a mutual insurance firm. The bigger Vanguard got, the more cost savings it would pass along to fund shareholders—a stark contrast to a traditional fund company or a bank. Vanguard transformed the index fund from a Wall Street laughingstock to a mainstream product—and one that now accounts for half the assets in U.S. equity funds, including more than $3 trillion at Vanguard alone.

Vanguard “was founded on the idea of insurgency, of disruption,” says Buckley, 50, who took over as chief executive in 2018, after starting as Bogle’s assistant in 1991 (and earning a couple of Harvard degrees along the way). “We’ve defined the way the industry is today.”

It is only a slight exaggeration. Fund fees in the industry have fallen for years, thanks in good measure to Vanguard’s price pressure and growth. Vanguard charged an asset-weighted average 0.68% in 1975, now down to 0.1%. The company led the way in eliminating commissions on non-Vanguard ETFs in 2018 (it never charged for its own), triggering a cascade of price cuts elsewhere. Vanguard’s influence is all the more impressive because the company doesn’t pay a cent for distribution. While the firm does plenty of sales and marketing, investors come to Vanguard, not the other way around.

Indexing didn’t take off just because of Vanguard, of course. Active managers did their part by putting up weak numbers. In the 1970s and 1980s, Buckley says, active-fund returns were more widely dispersed, partly because regulators hadn’t yet instituted rules for equal access to company information. Today, active returns hug the indexes, partly because everyone can see the same earnings reports and public meeting transcripts, whittling away the edge of active managers. Money has flooded out of active U.S. stock funds since 2008.

A phenomenal bull market has also helped: Tracking the S&P 500 would have netted you 13.4% a year, on average, over the past decade. Why bother with active, when you could probably do better with an index fund?

People who admire Vanguard are nonetheless frustrated by it, especially members of the growing independent financial advisor industry. The firm doesn’t custody assets for advisors—it quit custody service in 2003, saying it wanted to stay focused on investment management—and advisors view the firm as a technological laggard.

“They’re a trusted brand and incredible product producer, but if you ask advisors, ‘Do you consider Vanguard to be a technology leader or partner?’ the answer is no,” Lockshin says. “Vanguard doesn’t really know how to work with advisors other than helping distribute its products.”

The company has long battled perceptions that its technology is subpar. Over the past few years, Vanguard customers have experienced website outages, money-transfer glitches, and incorrect fund pricing, including an episode last August, when some Vanguard funds appeared to lose half their value overnight.

Buckley acknowledges that Vanguard has slipped up. “Our cash flow is greater than the next nine companies combined,” he says. “With that success comes high expectations, and you can’t sit and whine about it.”

He adds that Vanguard’s massive size makes it an easy target. “If we have a two-minute outage, that’s a headline, whereas other companies have a two-hour outage and it doesn’t make the news.”

Still, the frustration is palpable. Bob Bellagamba, a Vanguard customer, woke up one October morning to an alert from his bank that his checking account was overdrawn by $75,000. Vanguard had duplicated a transfer he had made to the firm a few weeks earlier. It took many phone calls and emails to resolve. “They seem to always have problems with technology,” says Bellagamba, 61, who gave up on consolidating his external account information at Vanguard because it wouldn’t update properly.

Allan Roth, an advisor and volunteer board member of the John C. Bogle Center for Financial Literacy, recommends Vanguard funds to his clients. But he says: “You can get better service and lower fees at Schwab or Fidelity. Vanguard’s web interface is clunky and hard to understand. It’s not seamless and has fallen further behind.”

Schwab, Ameritrade, and Fidelity offer more trading services and cash-management and investing tools. Schwab and others are introducing fractional-share stock investing to lure millennials, more mobile features, and, at Fidelity, even cryptocurrency custody.

Vanguard, meanwhile, has scaled back in some areas. The firm eliminated bill payment last summer; Vanguard says less than 2% of eligible clients used it. “We’re not a bank and online bill pay isn’t core to what we offer,” says Karin Risi, head of retail investing. New customers with $1 million to $5 million at the firm aren’t assigned an advisor anymore; they get sent to a call center. Vanguard says it has moved half its “flagship” clientele to this service model.

The changes annoyed customers like William Beck, who had to switch bill payments to a bank. He wasn’t pleased that his Vanguard representative left without notice. “I’ve thought about switching out of Vanguard if I can find better service elsewhere,” says Beck, 64, a retiree in Fairhope, Ala.

Investors gripe that Vanguard is prioritizing growth over service. “I see Vanguard burn through a lot of money on Google and Facebook ads,” wrote a client on the Bogleheads forum in August, after the fund-pricing glitch. “They should use some of that money to fix their issues first and then aim to increase their AUM [assets under management].”

The latest push is managed accounts. Vanguard’s advisory business could get a lift with the launch of Digital Advisor, which it plans to sell across its brokerage, retirement, and 401(k) plans. At an all-in cost of 0.2% in annual fees (including underlying funds), it will be priced below most rivals. Vanguard plans to distinguish it from competitors by keeping clients fully invested. Schwab and others require clients to hold cash in bank deposits, dragging down returns if the cash sits for long periods.

Digital Advisor won’t be as cheap on fees, but its performance could be superior without the cash drag. “Digital Advisor will be at a markedly lower price point for comprehensive services, all in a digital format,” Risi says. “The intention is to be disruptive.”

Yet Digital isn’t likely to disrupt the incumbent robos on price alone. “People go where they already custody money,” Lockshin says. “It’s like buying a car; you research it online but then go to a dealer and pay the price they set.”

If price were the main driver, he adds, Schwab’s free robo would have already put Betterment and Wealthfront out of business. Both those robos may be most vulnerable to Vanguard’s competition, since they are independent, use primarily Vanguard funds, and cost a bit more. Betterment is now working with Dimensional Fund Advisors as an alternative to Vanguard products.

Vanguard has a huge head start with its 30 million customers—eight million people who invest directly with the firm, plus another 22 million via advisors and institutions. It can count on the forces of customer inertia to build assets. Vanguard also plans to market its robo to intermediaries like broker-dealers, registered investment advisors, banks, and 401(k) plans.

More than $2 trillion of Vanguard’s funds are held through intermediaries, and it is the fastest-growing part of Vanguard’s business, says Tom Rampulla, head of financial advisor services. Vanguard’s other products for intermediaries include model portfolios, analytics software, and “behavioral coaching” techniques for advisors to use with clients.

Vanguard is no slouch in active management, either. While much of its growth has come from index funds, it has racked up assets in active fixed-income (managed in-house) and equity funds (run mainly by subadvisors). Wellington, started in 1929, has beaten 95% of peers over the past 15 years. Vanguard Health Care (VGHCX) and Vanguard Dividend Growth (VDIGX), which recently reopened, are considered to be two of the finest funds in their categories. Vanguard PrimeCap Core (VPCCX), despite stumbling lately, has long been a growth-fund leader. The company has also launched several active funds in the past year, including Vanguard Commodity Strategy (VCMDX), Vanguard Global ESG Select Stock (VEIGX), and Vanguard International Core Stock (VWICX). “We’re firm believers in active,” Buckley says.

If indexing wanes, however, Vanguard may not be able to count on active to pick up the slack. Like much of the industry, it has had outflows from active equity funds, including $18.5 billion in 2019 coming out of such funds as Health Care, Wellington, Windsor II, and PrimeCap. (Active fixed income, however, has taken in $30 billion.)

Low-cost funds have an edge in retaining assets over high-fee funds, but Vanguard appears to be slipping: It had $1.3 trillion in active assets at the end of 2018, $200 billion more than its recent total despite a strong bull market this year.

Vanguard’s competition, meanwhile, is getting stronger. A combined Schwab and Ameritrade will be a brokerage and fund behemoth. The merged firm is likely to price funds and advisory services more aggressively and expand banking services, says Shirl Penney, CEO of Dynasty Financial Partners, a technology firm for advisors: “They’ll be a much stronger scaled competitor to Vanguard.”

At the same time, index-fund fees have come down so much that it is getting harder to compete on price alone. Fidelity took a shot at Vanguard in 2018 with the introduction of zero-fee index mutual funds. Schwab, State Street, and iShares sponsor ETFs with expense ratios similar to Vanguard’s products. The differences in fees are negligible; they won’t add up to a material difference for most investors—especially given any tax bill that could come due from selling funds in a nonretirement account. Fidelity’s zero-fee funds have been a success, but they haven’t opened the floodgates from Vanguard. “I don’t think people are that price-sensitive,” Lockshin says.

Even if they’re not big traders, Vanguard’s brokerage clients are soldiering on with a bare-bones site. The company no longer offers debit or credit cards that reward investors with rebates or perks available at other banks and brokerage firms. Its margin rates are about average.

“They’ve proven time and again that their technology isn’t sufficient,” says Dan Wiener, co-editor of The Independent Adviser for Vanguard Investors newsletter. Vanguard’s site for advisors used to include more data, he says, but that has disappeared. Vanguard says, “We provide robust set of tools and data to advisors via Vanguard.com.”

Brokerage customers do get one treat: Cash in their accounts automatically sweeps to a money-market fund, where it is available for trading. Fidelity does the same, but most others—including Schwab, Ameritrade, and E*Trade Financial (ETFC)—sweep cash into bank deposits that yield less.

Buckley says Vanguard is investing heavily in technology and service, hiring more certified financial planners and working to avoid site outages and other glitches. “We have a higher bar, but we should have a higher bar, so we have to continually invest,” he says.

The big mystery at Vanguard is its own finances. The company doesn’t issue an annual report (unlike Fidelity, also privately held). Its revenues, profit, taxation, and compensation practices aren’t disclosed.

Buckely says that “a large amount” of its revenue comes from its funds and that it has issued financial reports to creditors. “To the extent that we retain earnings, we pay tax like any other company,” he says. Vanguard must operate “at cost,” charging the funds “only enough to cover its cost of operations.”

How much does Vanguard make? And what’s left to be doled out as investor savings? It’s possible to do some back-of-the-envelope calculations.

Assume Vanguard has at least $5.7 billion a year in revenue, based solely on its asset-weighted average expense ratio of 0.1% of AUM. Vanguard also charges 0.3% for its $148 billion in advisory accounts, and it has other revenue streams like 401(k) record-keeping, transaction fees, commissions, and variable annuities. Vanguard participates in the industry practice of revenue-sharing, charging other fund companies an asset-based fee of up 0.4% annually for distribution on its brokerage platform. These fees are a “significant source of revenue,” according to its disclosures.

If Vanguard took in $10 billion annually, it would be more than T. Rowe Price Group’s (TROW) revenue, at $5.6 billion, but less than BlackRock (at $14.4 billion), Schwab ($10.7 billion), and Fidelity ($20.4 billion). Asset managers and brokerages generate net margins of 25% to 30%. By that math, Vanguard’s operating income would be $2.5 billion to $3 billion—money it could theoretically pass along to investors as savings. Free trading may cut into Vanguard’s revenue a bit. But without knowing Vanguard’s sales or operating costs, it is impossible to say what it makes and doles out.

“We can’t pay a special dividend, but we can give it back by lowering expenses,” Buckley says. “That’s a sign that Vanguard is a profitable company and that we’re returning capital or earnings to our clients.”

Vanguard’s growth should help investors. The bigger it gets, the more it can share as costs come down. But it’s unclear how that’s playing out. Bogle was at odds with Vanguard’s leadership before he died because he thought the company could lower prices further. As Vanguard expands, the firm could share more of its bounty. But just how much will likely be a mystery.