(Bloomberg) – Jack Bogle is gone. But head west from Philadelphia to the leafy neighborhood of Malvern, Pennsylvania, and turn toward the Vanguard Group campus. There’s old Jack, cast in bronze, watching over his singular creation: Vanguard, the mutual fund giant that changed everything.
At Vanguard headquarters, 117 miles and a world away from Wall Street, Bogle’s figurative heirs are charting new paths for his eccentric company, that great popularizer of low-cost index funds.
The changes can seem essentially avant-garde: slow, steady, even a bit boring. But for hardcore fans, what’s at stake is the very soul of Vanguard, a colossus that oversaw $8 trillion in late February. Only BlackRock Inc. manages more.
CEO Tim Buckley tries to go beyond the revered founder’s playbook parts and reawaken the sometimes-sleepy Vanguard.
Courting the suspicions of traditionalists, Vanguard is pushing ever deeper into financial advisory, known internally as the “#2 engine” of growth. This gives the wealthiest clients and advisory clients the velvet rope treatment, contrary to Bogle’s philosophy. With little notice, he quintupled the minimum balance required for a personalized service to $5 million.
“I don’t think Bogle would have done a number of those things,” said John Rekenthaler, vice president of research for Morningstar Inc.
Vanguard continues to gobble up market share and attracted around $300 billion in net flows last year. But some of its greatest strengths — its outsider status, cautious approach, and focus on cost — come with downsides in an evolving industry. Some index fund enthusiasts known as Bogleheads are concerned that the company has strayed from the right path.
A series of big moves surprised employees and investors. Last year, Vanguard abruptly pulled out of much of its China business. It also cut a long-running medical benefit for retirees, causing such an outcry that Buckley reversed course and apologized.
“The way they chose to communicate the end of this benefit and the timing was extremely poorly done,” said Katherine Lowe, who worked at Vanguard for more than two decades, until 2020. “Vanguard generally takes the high road.”
Just this month, three investors filed a class action lawsuit, claiming changes to popular target date funds have imposed “massive” tax bills on thousands of individual clients, all to benefit large institutions. .
“Ethics came from Jack Bogle, and I’m a little concerned that they’re going different directions,” said Allan Roth, founder of Colorado-based financial planning firm Wealth Logic and self-proclaimed Boglehead.
And then there’s technology, a core component of Vanguard’s low-cost model. Management’s obsession with cost, along with the company’s unusual mutual ownership model, collides with an industry where spending on technology continues to rise.
A series of customer service glitches and errors have infuriated customers. In December, US customers were unable to access trade confirmations or monthly statements. And it came after high-profile gaffes in 2018 that saw Buckley – a Vanguard lifer who started out as Bogle’s assistant – swearing to spend $1 billion a year to update the company’s technology.
Buckley, 52, declined an interview request. Chas Kurtz, a spokesperson, said any changes reflect Vanguard’s long history of evolving to meet the needs of its customers.
“Vanguard has continued to innovate and evolve since Mr. Bogle founded the company,” Kurtz said in a statement.
Bogle, who died in 2019 and retired from Vanguard’s board of directors two decades earlier, is revered across America. When creating the first retail index fund in the 1970s, he preached that investment managers who claimed they could beat the market were mostly selling snake oil. His vision of so-called passive investing turned out to be one of the greatest financial innovations of the 20th century, saving money for tens of millions of investors and retirees.
On the quiet red-brick campus of Vanguard in suburban Philadelphia, you won’t find many aspiring masters of the universe lining the exercise trails or at the salad bar in the “kitchen,” one of many nautical names that Vanguard uses for its campus and staff — “crew” — with summer camp sincerity. (Bogle named the company for Horatio Nelson’s flagship at the Battle of the Nile in 1798 and for its leadership connotations.)
The culture is partly maintained by hiring employees from local colleges and promoting from within. Vanguard pays about a third less than the competition, according to a person familiar with its compensation practices.
Kurtz, Vanguard’s spokesperson, said the company offers “competitive, comprehensive, best-in-class Total Rewards.”
A lower base salary can be offset by its shadow equity program, as well as an exceptionally generous 401(k) plan that pays the equivalent of 10% of an employee’s salary into their retirement account.
“No one goes to Wall Street to hand future profits to customers,” said Eric Balchunas, an analyst at Bloomberg Intelligence and author of “The Bogle Effect,” a forthcoming book about Bogle’s life and influence – highlighting the difference between the priorities of Vanguard and its competitors.
Vanguard still pulls in astonishing sums and grew its market share from 17% to 26% from 2012 to 2021, according to Morningstar data.
But as it has amassed trillions, its net asset growth rate has slowed, trending downward since 2018.
Vanguard has been so successful in spreading its gospel of low-cost index funds that it has been embraced by top rivals including BlackRock, Charles Schwab Corp. and Fidelity Investments.
All of this helps explain why Buckley is making such an effort with the burgeoning financial advice industry.
Personal Advisor Services, as the company is known, has attracted $275 billion in assets since its launch in 2015.
It charges a fee equivalent to 0.3% of a client’s assets, or about $150 per year for the minimum portfolio of $50,000. At Fidelity, the advisory fee for similar services is 0.5% or more.
It’s a high-stakes decision. The advice is supposed to help spur growth now that index funds and fee reduction are ubiquitous. Vanguard has also opened up a private equity offering, managed with HarbourVest Partners, to qualified individuals – entering a higher-fee area than the cheap and accessible index arena. Kurtz called the pact “a continuation of Vanguard’s enduring commitment to expanding access to investment strategies.”
An initiative that captures Vanguard’s challenges was known as the Innovation Studio. Opened in 2017 with Bogle’s blessing, it was supposed to find ways to reach new kinds of customers. After a string of ventures that failed to prosper, the studio turned to direct indexing, a growing trend among wealthy people that involves buying the stocks of an index, rather than owning a fund. mutual fund or an ETF.
Vanguard set up an outpost for the Philadelphia studio, complete with the requisite startup-style ping pong table, exposed ductwork, and a blackboard with phrases such as “Let’s do something awesome.” But the team was instructed not to tell potential buyers they were calling from Vanguard, frustrating and confusing some staff, according to a person familiar with the matter. Instead, they said they represented a Philadelphia-based innovation company and their calls were rarely returned. BlackRock, Morgan Stanley and JPMorgan Chase & Co. all created their own direct index businesses before Vanguard moved in.
Eventually, in 2021, Vanguard acquired Just Invest – its very first acquisition. The Innovation Studio closed the same year. Kurtz noted that he was part of Vanguard’s corporate strategy group, which still exists.
To some extent, the Innovation Studio episode encapsulates a situation unique to Vanguard: a story of revolutionary change coupled with an aversion to being a first mover. Software engineers have been wringing their hands, according to current and former employees.
To fill gaps in technology staffing, Vanguard has come to rely heavily on external consultants and contractors. McKinsey & Co., for example, was hired to improve the efficiency of the technology department and spawned a project called “New Ways of Working,” or NWOW, which was supposed to flow information efficiently. Engineers joked that these were basically the systems that other companies had routinely adopted long ago, one of the people said.
Customer service seems to suffer. A site that collects opinions, Customer Service Dashboardshowed that the proportion of customer service complaints from Vanguard exceeded those from Schwab and Fidelity.
Roth, of Wealth Logic, said trying to get her name removed from her adult son’s Vanguard account was a challenge. He had one at Fidelity too, and that was no problem.
“Fidelity was done in 20 minutes, with five minutes of my time,” Roth said. “With Vanguard, it took over a month, with many hours of my time.”
“We take our customers’ feedback seriously, aspire to deliver an exceptional experience, and make significant capital investments to achieve this,” Vanguard’s Kurtz said.
Other Bogleheads are also complaining. Rick Ferri, a longtime adherent, says the discovery of the Vanguard index funds was “like the fog has lifted and the sun is shining”.
But when it comes to calling Vanguard, “I try not to,” he said. “I have to wait on hold. And wait and wait and wait.
–With help from Silla Brush and Dawn Lim.
To contact the author of this story:
Annie Massa in New York at [email protected]