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Vanguard stumbles across the axis from the cult of Jack Bogle

(Bloomberg) — Jack Bogle is gone. But turn west from Philadelphia, toward the leafy town of Malvern, Pennsylvania, and onto the Vanguard Group campus. Old Jack, cast in bronze, is surveying his singular creation: Vanguard, the mutual-fund giant that changed everything.

Headquartered at Vanguard, 117 miles and a world away from Wall Street, Bogle’s figurative successors are exploring new avenues for their quirky company, the great popular of low-cost index funds.

Changes can seem quintessential at best: slow, steady, even a little boring. But for fans, what’s at stake is the spirit of Vanguard, a colossus that oversaw $8 trillion in late February. Only BlackRock Inc. manages more.

Chief Executive Officer Tim Buckley is trying to move beyond parts of the revered founder’s playbook, and sometimes wake the sleeping vanguard.

Allaying the skepticism of conservatives, Vanguard is pushing for financial advice, known internally as “Engine No. 2” of growth. It’s giving wealthy clients and consultant clients the velvet-rope treatment in contrast to Bogle’s Everyman ethos. With short notice, it raises the minimum balance required for a personalized service five-fold to $5 million.

“I don’t think Bogle would have done many of these things,” said John Reckenthaler, Morningstar Inc.’s vice president of research.

Vanguard’s market share is still growing and last year saw nearly $300 billion in net inflows. But some of its biggest strengths – its outlandish position, cautious approach and focus on costs – come with shortcomings in a changing industry. To some index-fund enthusiasts known as Bogleheads Freight, the company has straight and narrowly shut down.

Several big moves have surprised employees and investors. Last year, Vanguard abruptly withdrew from most of its business in China. It also curtailed long-standing medical benefits for retirees, sparking such outrage that Buckley reversed course and apologized.

“The way they chose to communicate that advantage lapse and the timing they chose was done extremely poorly,” said Katherine Lowe, who, until 2020, at Vanguard for more than two decades. Work done. “Vanguard usually takes the high road.”

Read more: Shock and tears: behind Vanguard’s withdrawal from the China market

This month, three investors filed a class-action lawsuit alleging that the change to the popular target-date fund has caused thousands of individual clients to suffer “massive” tax bills, all to the benefit of large institutions. was done.

“The ethics came from Jack Bogle, and I’m a little concerned that they’re going in different directions,” said Alan Roth, founder of Wealth Logic, a Colorado-based financial planning firm and a self-described Boglehead.

And then there’s technology, a key component of Vanguard’s low-cost model. Management’s obsessive focus on cost, as well as the company’s unusual mutual ownership model, are running against an industry where spending on technology continues to grow.

A series of glitches and customer-service errors have affected customers. In December, US customers could not access trade confirmations and monthly statements. And that came after high-profile gaffes in 2018 saw Buckley — a Vanguard lifesaver who started as an assistant to Bogle — vow to spend $1 billion a year updating the firm’s technology.

Buckley, 52, declined an interview request. Chas Kurtz, a spokesman, said any changes reflect Vanguard’s long history of evolving to meet the needs of its customers.

“Vanguard has been continuously innovating and growing since Mr. Bogle founded the firm,” Kurtz said in a statement.

different vibe

Bogle, who died in 2019 and retired from Vanguard’s board two decades ago, is revered across America. Creating the first retail index fund in the 1970s, he promoted that investment managers claimed they could beat the market, mostly selling snake oil. His approach to so-called passive investing proved to be one of the biggest financial innovations of the 20th century, saving money for millions of investors and retirees.

At Vanguard’s quiet, redbrick campus in suburban Philadelphia, you won’t find many aspiring masters of the universe with exercise trails or hitting the salad bar in the “galley,” one of the many nautical names Vanguard uses for its campus and staff. – “The Crew” – with summer-camp sincerity. (Bogle named the firm for Horatio Nelson’s flagship at the Battle of the Nile in 1798, and for the connotation of its leadership.)

The culture is maintained partly by hiring staff from local colleges and promoting from within. According to a person familiar with compensation modalities, Vanguard pays about one-third less than the competition.

Vanguard spokesman Kurtz said the firm offers “competitive, comprehensive and best-in-class aggregate awards.”

The low base salary can be offset by its phantom equity program as well as an unusually generous 401(k) plan that contributes the equivalent of 10% of an employee’s salary to their retirement account.

“No one goes to Wall Street to turn clients into future profits,” said Eric Balchunas, an analyst at Bloomberg Intelligence and author of “The Bogle Effect,” an upcoming book about Bogle’s life and influence. Preferences in Vanguard and its competitors.

According to data from Morningstar, Vanguard is still pulling in astonishing sums, and has grown its market share from 17% to 26% from 2012 to 2021.

But as it has accumulated trillions, the growth rate of its net worth has slowed, waning in the years since 2018.

Vanguard has been so successful in spreading its gospel of low-cost index funds that it has been adopted by top-tier rivals including BlackRock, Charles Schwab Corp. and Fidelity Investments.

All of this helps to explain why Buckley is making such an effort with the growing financial advice business.

new lines

Personal advisory services, as the business is known, has attracted $275 billion in assets since its launch in 2015.

It charges a fee equal to 0.3% of the client’s assets, or approximately $150 per year for a minimum $50,000 portfolio. At Fidelity, advisory fees are 0.5% or more for similar services.

This is a high-stakes decision. The advisory is believed to help propel growth now as index funds and fee cuts are ubiquitous. Vanguard also opened a private equity offering run with Harbourwest Partners to eligible individuals — entering an area with higher fees than the cheaper, accessible index sector. Kurtz called the agreement “a continuation of Vanguard’s enduring commitment to broadening access to investment strategies.”

One initiative that captured Vanguard’s challenges was known as Innovation Studio. Opened in 2017 with Bogle’s blessing, it was about to find ways to reach new types of customers. After a series of projects that failed to flourish, the studio turned to direct indexing, a growing trend among the high-net-worth set that involved buying the stocks of an index rather than owning a mutual fund or ETF. Is.

Vanguard set up an outpost for the studio in Philadelphia, complete with essential start-up-style ping-pong tables, exposed duct work, and a blackboard with phrases like “Let’s Make Something Awesome.” But the team was instructed not to tell potential acquirers they were calling from Vanguard, frustrating and confusing some employees, according to a person familiar with the matter. Instead, they said they represent a Philadelphia-based innovation company, and rarely get their calls back. BlackRock, Morgan Stanley and JPMorgan Chase & Co. all divested their own direct index businesses before Vanguard’s arrival.

After all, in 2021 Vanguard acquired Just Invest — its first acquisition to date. The Innovation Studio closed in the same year. Kurtz noted that it was part of Vanguard’s corporate strategy group, which still exists.

crisis service

To some extent, the Innovation Studio episode covers a specific Vanguard plight: a history of radical change coupled with an aversion to being first movers. Software engineers were left scrambling, according to current and former employees.

To fill gaps in technology staffing, Vanguard has become heavily dependent on outside consultants and contractors. For example, McKinsey & Company was hired to improve the efficiency of the technology department, and created a project called “New Way of Working”, or NWOW, which was to make information flow efficiently. The engineers joked that it was basically systems that other companies had routinely adopted long ago, one of the people said.

Customer service appears to be suffering. Customer Service Scoreboard, a site that collects feedback, showed that Vanguard has a higher proportion of customer service complaints than Schwab and Fidelity.

Wealth Logic’s Roth said trying to get his name removed from his eldest son’s Vanguard account was a challenge. They even had one at Fidelity, and that wasn’t a problem.

“With five minutes of my time, allegiance was complete in 20 minutes,” Roth said. “With Vanguard, it took over a month, with many hours of my time.”

“We take our customer feedback seriously, aspire to deliver an exceptional experience, and are investing significant capital to get there,” said Vanguard’s Kurtz.

Other Bogleheads are complaining too. Rick Ferry, a longtime follower, says that exploring Vanguard index funds was “like the fog had lifted and the sun was shining.”

But when it comes to summoning Vanguard, “I try not,” he said. “I’ll have to wait on hold. And wait and wait and wait.”

– With the help of Stila Brush and Don Lim.

To contact the author of this story:
Annie Massa in New York [email protected]

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