Vanguard: can it keep playing disruptor?
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Naming your company can be a tricky proposition. Do you want to project strength, or power, or reliability? The FT's US managing editor, Brook Masters, says that back in the 1970s, a guy named Jack Bogle was facing this exact problem. He was trying to figure out what to name his mutual fund company, and eventually he decided to go with a nautical theme.

Specifically, he named his firm after a British battleship from the Napoleonic Wars. Vanguard was Horatio Nelson's flagship during the Battle of the Nile at the very end of the 18th century. And this is a very crucial battle in the Napoleonic Wars where the British Navy destroys the French Navy, at least temporarily, by using new tactics. And just like that famous ship, Vanguard turned the tide.

not of war, but of stock picking. Vanguard fundamentally reshaped retail investing. The firm used new tactics that their competitors had never really encountered before. A little bit like Vanguard the ship during the Battle of the Nile. Vanguard's strategy forced their rivals in asset management to adapt. And ever since then,

It's been cruising, just to put it bluntly. Vanguard is now the second largest asset manager in the world. It runs the largest mutual fund in the world. This month, it also became the manager of the world's largest exchange-traded fund, which is the hot new product. It's basically enormously successful. But recently, this massive ship brought aboard a new captain. And notably, he's an outsider.

poached from a competitor, which is a first in Vanguard's history. Vanguard has been steaming ahead, but now it has a new CEO who has ambitions to do the same thing to different parts of the financial services industry. So it's, you know, it's looking for new worlds to conquer. Now, these new worlds that Brooke's talking about are other pockets of the financial services industry. And the thing is...

If Vanguard is as successful in these new areas as it has been in the past, it could fundamentally disrupt financial services. I mean, they are basically an iceberg for the rest of the industry. And if they succeed at what they're doing, it could cause chaos for the rest of the industry. I'm Michaela Tendera from the Financial Times. Today on Behind the Money...

Vanguard became one of the largest money managers in the world by following a philosophy that's grounded the firm for decades. Now there's plans to tackle some other areas of financial services too. And a new CEO, an outsider, is tasked with leading the charge. But do they have to move beyond their old founder's mantra in order to achieve their goals?

Brooke, welcome to the show. It's great to have you here. Thanks for having me. So this whole disruption that Vanguard achieved in asset management, it really begins with the firm's founder, right? Jack Bogle. Tell me more about him. He was a longtime investor and he became obsessed with the idea of low cost, of finding ways to make it more affordable, particularly for small investors who can't buy their way to cheaper fees, making it more affordable for them to invest in the markets.

Key point here, and you're going to hear this a lot going forward, Jack Bogle was all about keeping Vanguard's costs low, low, low for their customers. I asked Brooke what kind of a name she might give this strategy. I think you could think of it as cheap and cheerful. So early on inside Vanguard, Bogle pulls off this cheap and cheerful strategy in two important ways.

The first has to do with how the firm would invest clients' money. At the time, the dominant style of investing was something called active management. That's where stock picking experts and researchers are pulling together baskets of securities that they think will perform well. And then charging you, the customer, higher fees to make all that happen.

Bogle thought this was essentially nonsense. Yeah, the fees in the mutual fund industry, I'm sorry to say, are generally pretty outrageous. I think the industry's got to adjust to a different era. The fees are too high and that's all there is to that. Bogle had a different plan.

He was a pioneer and a very important one of the idea of really cheap equity investing. The best way to do it is to not pay for experts. You just match what the markets do. It's called index investing. Index investing, or passive investing, pretty much just mimics a certain stock index like the S&P 500. That's the 500 biggest publicly traded U.S. companies by market cap.

And so if the S&P 500 is up, you're up. It's much, much cheaper because you don't need anybody to do any research. You don't have to think about what you're buying. And so his whole view was like, how can we make it as cheap as possible for people to invest in the markets for the long term? If you don't have access to some schnazzy money person and you don't need white glove service, it's great. It's absolutely a fundamental way that a small investor can profit from the markets over the long term.

So there's the passive investing piece of this. But remember, I said there's something else that Bogle does too. He also sets up Vanguard with a very unique ownership structure.

Vanguard is pretty much the only big company where the ownership of the fund management company is actually the funds themselves, which sounds it's very circular. But basically what that means is there aren't any outside shareholders like BlackRock has outside shareholders. So if it has leftover money, it's supposed to pay dividends or buy back shares and make life happy for its shareholders.

Like most companies. And that's just that's how modern stock investing works. Vanguard has this weird structure where there are no outside shareholders. There's no founding family. There's no partnership. Whatever money is left is supposed to go back to the people who also invest in the funds. So what that means is any leftover money that would typically go to shareholders is

Instead, Vanguard turns into even more cuts, pushing the firm's fees lower and lower. Now, these efforts, the passive investing and the ownership structure, sent the industry spiraling.

It just squeezed the heck out of the industry. It forced everyone to think of ways to bring their costs down. And it really completely cut a swathe through particularly active investment funds, but just the industry more broadly, that it absolutely said, like, you, investor, don't have to be paying these fees. You can pay less and you can walk home with more money. Yeah. I mean, the appeal is just kind of undeniable.

Absolutely. And it also this is a period when Americans in particular are shifting to what are called 401k plans, which are retirement plans. So they are investing their long term, their 30 year money, their 50 year money into the stock market and into the bond market.

And so you really could see over time how much it matters. Like over two or three years, it's, you know, 2% versus 3% or 3% versus 5%. But you compound that and we're talking millions and millions of dollars and staggeringly better results. Now, Jack Bogle retired from Vanguard way back in the 1990s.

But his cheap and cheerful strategy kept the firm sailing with the wind at its back for decades. Lately, though, the competitive landscape has changed. I think the thing that's happened in recent years is many, many other providers are also doing index funds and also doing cheap. So fees have come down dramatically, both for active and passive funds. And so Vanguard, while it remains the cheapest pretty much,

has found itself, you know, it's less unusual. The other thing that's happened is other companies, particularly Upstarts and Fintechs, have been offering new ways to trade. And, you know, the whole meme stock phenomenon where lots of retail investors got excited about being able to trade shares. So there is another way for small investors to get involved in the market now. What Brooke's talking about here are companies like Robinhood and Betterment.

They offer trading without the big fees. They have investment advice. And they also have these sleek apps. As a little investor, you buy derivatives and you buy wacky stuff. And you can do it on your phone.

Vanguard, meanwhile, with his little cheap and cheerful theory of the universe. So they didn't offer all that, all the bells and whistles. They weren't going to give you confetti when you made a trade or any of that stuff. And so it's not that they ever shrunk. They continue to grow dramatically. But they were losing out on some investors who wanted something different. Now let me zero in here on the last thing that Brooke said. It's important. Vanguard's still cruising comfortably, being cheap and cheerful. Yeah.

But they are missing out on a whole new crop of investors, particularly young ones. And so Vanguard in recent years decided to lean into three new offerings to expand their reach. About five years ago, they decided to make a push into active fixed income. That puts them into conflict with active bond managers who pick bonds rather than just following an index.

They are also making a push into high-yield savings accounts, which puts them on a collision course with banks and wealth managers. But Vanguard's pushing in another direction, too.

And this could be the effort that shakes things up the most. The third thing, which is perhaps the most revolutionary and the one that really is going to cause all kinds of ructions, is they're offering financial advice with the idea — advice is, how much of your money should you put in stocks versus bonds? You know, when should you shift the balance because you're getting old and you can't afford to lose things? These are really confusing issues. And lots of people want advice.

Advice traditionally has been something that only rich people get because it's expensive to provide advice. Like, you know, some guy sitting and looking at my finances telling me, look, Brooke, you want a house in five years, so therefore you should do this with your money. That takes time and energy. And they charge for it. And so what Vanguard's trying to do is use particularly computers, but also just their huge size, as always, to offer lower cost advice to people who probably couldn't afford to buy any advice elsewhere.

Vanguard wants to offer each of these things, the bond investing, the cash accounts, the investment advice for, you guessed it, cheap, cheap, cheap. That is their mantra after all. And here's the thing. They've got a new CEO who's in charge of making those a reality. His name is Salim Ramji. I asked Brooke about him.

What else should we know about him? You've interviewed him a couple of times now, right? I've actually, I know him pretty well because he was a McKinsey consultant and then he went to BlackRock. At BlackRock, he ran their index funds. So he is an expert in this sort of passive investing stuff. So what's interesting is he is the first external CEO Vanguard has ever had.

That's a bit of a shocker, you know. And so there's an interesting question like where will he take them? They obviously felt they didn't have what they needed internally. And so obviously they're trying to do something different. You don't bring in an outsider if everything's perfect. Yeah, that's a big deal considering Vanguard's never hired a CEO directly from an outside firm before. So then what's Ramji's plan to tackle this stuff?

I mean, Vanguard had already, under the previous CEO, started thinking about going into advice. It had actually done quite a bit. But he is out there spearheading it, telling the story to the world, pushing it. He brought in another outsider, interestingly, to run the financial advice stuff, somebody who had been at Fidelity, which is one of Vanguard's big, big rivals and way, way ahead on advice. They do a lot of advice.

It's kind of like, I mean, they were definitely working on it quietly. They're now seriously full speed ahead. And they've got a guy who's out there cheerleading, but also leading it. I mean, he's the guy who says, damn, the torpedoes full speed ahead. OK, so Ramji is pushing into these new areas, investment advice, but also the bonds and the cash accounts. So what challenges do you see ahead? He's an outsider. You know, there could easily be organ rejection.

You know, Vanguard is proud of being different from everybody else. You know, they're based in suburban Pennsylvania. They're, you know, far from Wall Street. Lots and lots of people spend, if not their entire career, the vast bulk of their career at Vanguard, you know,

If he is seen as pushing too far too fast or he's seen as sort of too slick or not respectful enough of something that many of them have put their lives into, he has to take the people with him, the people that they call crew. Remember going to Jack Bogle and his ship fascination. They're called crew and the executives are called officers. And so if they decide they could easily throw him overboard. Mutiny on the vanguard. Right.

That's the first big challenge is he has to convince people that this is the right thing to do and he's the right person to lead it. Yeah. So that's the first thing. What aside from that is he going to face? The second huge challenge is much of what they want to do depends on having really good technology, particularly the advice stuff, where the only way you can make advice affordable is through heavy use of A.I. and computers and

And they have historically had terrible technology, like famously bad technology. Part of the cheap and cheerful was like, we don't invest in this stuff. And it was just dreadful. Brooke, I'm curious, because here at the Financial Times, we have Vanguard as our retirement provider. Now, actually, I started at the FT in 2022, and I've thought that the platform has

I thought it was pretty snazzy, actually. But what's your take on that? It's I mean, I would say you're lucky in that you arrived in the middle of a transformation. They started spending big money on technology about six years ago because they realized they had to do more. And they started spending a billion a year back then. They now spend three billion a year. And so they have been in the process of improving their technology.

It wouldn't surprise me that if you happen to hit the right pocket that you got the good technology because they definitely are much better. I have been using Vanguard for decades because my first 401k plan and my first employer was a Vanguard. And I will say it is radically different than it was when I started.

I mean, one of my single most frustrating experiences with Vanguard was I had a 401k retirement plan from my old employer, which was at Vanguard. And I had a 401k retirement plan from the FT, which was also at Vanguard. And I wanted to combine them because if you put things together, they obviously cut your fees and it's much easier to manage. And so I called Vanguard and said, like, can I just squash them together? And they said, well, yes, you can. But the way you have to do that is

is you have to close your old account. We have to mail you the check. And then you have to mail it back to us in order to do it. And I was like, but you have my money. And they're like, nope, can't do it any other way. And that was, I think, three years ago, two and a half. I mean, that's insane. Like, I'm already depositing checks in my bank off my phone, and Vanguard can't combine two accounts? I mean, that's outrageous. Okay, so the new CEO has some obstacles that he has to figure out.

He's an outsider. They've got to improve their tech. Now, I've got to make at least one more nautical reference here. But how does Ramji navigate all this? Which way does he steer the ship? Well, I think the first thing he's done since arriving last summer was to really be respectful of Vanguard's traditions and talk a lot about Jack Bogle and how much he respects him. And in one sort of telling gesture, when he redecorated his office...

he thought back to Vanguard the ship. He asked them to find the painting of the ship that had once hung in a prominent place, and they pulled it out of a basement, and he's now got it hanging behind his desk in his office. Yeah, that's a big gesture. That's a big gesture. It's like, I respect this, and I understand your heritage. And so I think that's a big start, and he has to continue to do that kind of thing. He also has to hope that the woman he brought in from Fidelity to run the vice arm is similarly able to

change the way they do advice and lead this big push without alienating people. I mean, she pushed through big changes at Fidelity, but also lasted less than two years. So she is definitely a change agent.

And how well that goes, who knows? On the tech side, I think they have been investing. And the real issue for them on the tech side, I think, is assuming that if it is as they claim that their technology really is much better, they have a perception problem more than anything. Because any website anywhere has days. I mean, you know, the FT periodically doesn't work.

But because they have this reputation, anytime it wobbles even a little bit, everyone's like, oh, look, it's them again. And so stuff that they would completely tolerate from Walmart, they're like, oh, my God, Vanguard's terrible tech. So that's going to be a matter of just proving that they can handle busy trading days, that they'll be there, that it all works. And I think that takes time. So.

So if Vanguard, you know, succeeds and does manage to push forward on these three areas they're trying to work on, how does that impact the rest of the investment industry?

I think it could be really scary, particularly for the people who are known as wealth managers, who are the ones who give advice. Some asset managers have wealth management arms and give advice like Fidelity. But lots of places like private banks and independent financial advisors who you go to them in their little office and they do stuff. If Vanguard's actually out there offering a good product for a good price, and frankly, Vanguard has –

a tremendous brand. I mean, people may get annoyed at their technology, but everybody believes they are doing their best and what they offer is cheap and it's in your interest. So basically, if you're willing to take all computer advice, no human beings, they'll give you advice for one-fifth as much money. And if you have at least $10,000, which isn't very much considering most Americans have retirement money,

They'll do it for basically a third of what the pay for wealth managers are doing. I mean, they are coming in and seriously undercutting the industry. And if people are comfortable with that and decide that they want that, that could really upend the business models of all of these companies. So what happens if Vanguard fails in any of these areas? I mean, does it have much to lose? I mean...

I think what Vanguard would say is everything they invest is money they could have given back to their investors. So I think they can easily cancel things and stop. But that's, I mean, that's an admission of failure. And when you're owned by your investors, you don't want to be wasting their money. So I think it's embarrassing. Do I think it will undermine Vanguard's success? Probably not.

So, as you mentioned, you know, for several decades talking about Vanguard, their strategy has been cheap and cheerful. Do you see that changing in the future? Do we give it a new name or is it more of the same?

I think it's still cheap for sure, but they are trying to use things like AI and behavioral economics to nudge people into doing all this stuff rather than just laying their wares out and saying, come if you want. They are actively trying to push you. Cheap and clever is what they would like to be. I'm not sure they're going to get there, but I think their hope is to someday be both cheap and clever.

OK, so Vanguard led the charge for so long and they're taking aim at new areas of financial services. I mean, what's the lesson here? Just don't get complacent. I mean, the investment industry has been, you know, spent many years being fat and happy. They made a lot of money. They made some money for their customers because customers don't know what they're doing. When you compare the profit margins in financial advice to profit margins in, say, supermarkets where people understand what they're buying.

Vanguard's lesson is just because you're selling a complicated product does not mean you can take an unfair share of the take. And what they have said is what people were used to paying, they don't have to pay anymore. And that's a big change.

And that'll kind of continue as they move into these other areas. And they're not the only ones. I mean, that's the thing. I mean, Vanguard is big and famous and does this stuff, but there are other cheaper alternatives. And I think that is pressing the advantage home, that any part of the industry that has still got fabulous profit margins and is not having to compete for customers in the same way should be on notice that, you know, somebody is coming to get them.

Brooke, thanks for coming on the show. Thanks for having me. Behind the Money is hosted by me, Michaela Tendera. It's produced by me, Safiya Ahmed, and Katya Kamkova. Sound design and mixing by Sam Giovinko, Joseph Salcedo, and Breen Turner. Original music is by Hannes Brown. Topher Forges and Manuela Saragosa are our executive producers. Cheryl Brumley is the global head of audio. Thanks for listening. See you next week.