Vanguard without Jack Bogle
The question isn’t whether Vanguard will change without its founder, the late John Bogle, but rather how will it change?
When Bogle died in January, he hadn’t held an official management role at Vanguard since 1996, yet he went to his office nearly every day on the main campus in Malvern, Pennsylvania. Through his Bogle Financial Markets Research Center, he pressed on spreading the word of low-cost indexing. “I always felt Jack acted as a check on management’s behavior. With his death, that check is no longer there,” wrote personal finance expert Jonathan Clements, a former Financial Planning columnist, in a recent Humble Dollar blog.
A glimpse of Vanguard’s future could be seen in mid-October, when nearly 200 people gathered in the Philadelphia area for the 2019 Bogleheads conference in the newly named John C. Bogle building. Since this was the first event without John Bogle, much of the conference was dedicated to celebrating his life and numerous accomplishments. A couple of senior Vanguard staff members addressed Vanguard’s future.
In my mind, without Bogle, the future looks just a bit uncertain.
Since 1996, when Bogle underwent a heart transplant and stepped down as CEO, Vanguard has launched ETFs and many new funds. Some of those new funds included target-date retirement funds, introduced in 2003, which now provide balanced, diversified portfolios to millions of Vanguard retirement plan participants. “Vanguard will continue to innovate and disrupt the financial services industry, ” Rebecca Katz, a principal and head of corporate communications, assured the Bogleheads. She added that Vanguard will be investing in client experiences and advice, referring to Vanguard Personal Advisory Services. It’s a message that I have heard before. “Are we trying to disrupt ourselves? Constantly,” said CEO Tim Buckley at a May 9 Morningstar press conference.
Yet I don’t view this as a threat to advisors. I happen to embrace low-cost advice from Vanguard and other low-cost robo and hybrid advisors because low fees are good for consumers. And I think good advisors should not be worried since much good advice cannot be replicated via technological solutions.
Another concern: Bogleheads, as well as overall industry watchers, have worried that Vanguard will veer away from being owned by clients. Indeed, Matthew Brancato, a principal and global head of the portfolio review department, was asked point blank, whether Vanguard will ever de-mutualize? It’s a valid concern. You need look no further for an example than that of Prudential Insurance which was once a mutual owned by its policyholders and is now a publicly owned company.
Many of us were relieved when he answered the question no. In my opinion, being client-owned is the best way to stay client focused. Still, there are some clouds on the horizon.
One common Bogleheads’ concern is the proliferation of new funds. In fact, Broncato received a question about it during the conference. He read aloud from an index card handed to him on stage asking what John Bogle would have thought about the new Vanguard Commodity Strategy Fund (VCMDX) launched June 25 of this year? Broncato acknowledged Barry Ritholtz’s podcast interview with Bogle where he said no to commodities. But Brancato said Vanguard launched a commodities futures fund rather than a commodities fund. Now I don’t think a single Boglehead thought Vanguard was building storage tanks for commodities like oil or corn.
Here’s what Brancato left out: In the aggregate and before costs, not a penny has ever been made in the futures market. And he didn’t note that the index the fund uses as a benchmark, the Bloomberg commodities index, has had a negative 4.32% annual return over the past 10 years ending September 30, 2019. To be fair, it is possible to collect a premium in the same way an insurance company does by going long on futures and at least Vanguard didn’t launch it when commodities were hot.
There are some signs of client discontent. Many Vanguard Flagship clients (over $1 million in assets) are upset that they are no longer assigned an individual representative and that earlier this year Vanguard eliminated the Vanguard Advantage cash management banking features. Only about 2% of those clients who qualified for such an account had one and only about half of those used it actively, Katz noted.
Vanguard now has fierce competition with low- or no-cost funds and no commission trades, she said, and added, “that’s a good thing because it’s all about the investor.” That philosophy perfectly encapsulates the John C. Bogle culture that thankfully lives on. We should embrace that what is good for our clients is also good for us as advisors.
Vanguard will continue to change and, on balance, that’s a good thing. I certainly won’t agree with all of the changes and all of the new funds launched but I acknowledge that Vanguard must be very different than during the years John Bogle was steering the ship. Technology and competition has changed dramatically and Vanguard must change as well. I do, however, expect that Vanguard will remember that being client-owned always means putting the client first.
(Allan Roth is a volunteer board member of the John C. Bogle Center for Financial Literacy.)