One Day in Malvern

John De Goey There are a number of benefits associated with being a portfolio manager. Portfolio managers work in a stimulating and ever-changing environment with some of the brightest and most interesting people around. Furthermore, having the personal opportunity to be a low-level thought leader for an industry in flux is also a great source of intellectual fulfillment and responsibility. Finally, being able to help people reach their life goals with comfort and satisfaction is perhaps the most rewarding benefit of all.

Imagine how great it would be if you could combine all of those things into a single day trip where you had the opportunity to meet one of your idols! That’s what I experienced this summer when I spent September 20, 2017, at the ‘campus’ of the venerable Vanguard Group in suburban Philadelphia – a town called Malvern.

Doing a due diligence trip is often a labour of love. That’s especially the case with Vanguard – a company that outgoing CEO Bill McNabb has transformed from “a small Malvern company” into “a global company based in Malvern”. The growth has been staggering. Vanguard is more than 40 years old and it received a fair amount of criticism when it magnanimously started out since the index-based value proposition was seen by some as “Un-American” in nature. As time has moved on, the company’s homespun, folksy roots have given way to more contemporary offerings and delivery methods. After a tentative start, the company has grown like a weed.

My day consisted of three one-hour meetings with senior managers who have key roles in advancing the company’s mission on a day-to-day basis and also a fantastic hour-long meeting with the company’s venerable founder – the incomparable John Bogle. I met with one of the managers of the Vanguard “Voyager Select” Program, which offers advice to over 85,000 Vanguard clients with between $500,000 and $1,000,000 (all figures in USD) in household assets, a manager from the “Flagship” Group – dealing with private clients with seven-digit portfolios and a sales manager for the Financial Advisor Services division – the folks that support people like me in what we do when helping retail clients. All three were familiar with my bio when I arrived and all three seemed genuinely eager to hear my comments and answer my questions as we dove into their fields of expertise. It is nearly impossible not to be impressed by the operation.

Space would not allow me to properly cover all the material that was discussed. I simply will itemize the highlights of where the company has come from – and where it is headed. What follows is especially amazing given that the company was founded as a direct-to-consumer offering (i.e. early products were offered without the benefit of having an advisor to help in answering planning and retirement questions) ensure overall suitability or modify investor behavior. Unlike most investment products in Canada, Vanguard’s products were “bought”, not “sold” in the early days. A few quick facts:

The company only entered into the advisory (i.e. intermediary) business in 2001, having spent its first quarter-century as a direct-to-consumer company.
The Financial Advisor Services Division has grown to be the biggest part of the company, with the most Assets Under Management (AUM) in the company – and over half of all cash flow.
As recently as 2014, the industry average percentage of advised assets was 70%, yet Vanguard’s was a paltry 2% . Vanguard asked clients if they wanted advice and about ¼ of them said they did. As such, Vanguard now has a hybrid robo-offering (with human interaction) available to clients at the competitive price of 30 basis points (bps)(0.3%).
By the end of last year, Vanguard had a total of about $1.4 trillion in retail assets in the U.S. alone – and another $2.6 trillion in American institutional assets.
As of the end of 2016, Vanguard had 7.8 million client families.
Only about 60% of Vanguard AUM is passive. The other 40% or so is actively managed and the average Management Expense Ratio (MER) on their active products is often below 50 bps.
Today, about 90% of Vanguard’s client interaction is via their website. This is a simple company that has aggressively embraced technology as a means of enhancing the client experience and overall client satisfaction.

The impression I took away was that, notwithstanding the simplicity and down-to-earth nature of the company’s self-effacing founder, this is a company that is firmly focused on the future. In fact, I was told early on that Vanguard has four clear elements to its future focus:

Accelerate brokerage adoption (that means getting more folks like me to use their products).
Expand advice services (to repeat, after starting from ground zero in 2014, they already offer advice to over 85,000 people) – they’re just getting started.
Shift aggressively to digital offerings.
Invest to enable personalization.

“Mass Customization” is a forward-looking term that was used a fair bit in the late 1990s as it pertained to investment policy statements. The clear sense I get now is that Vanguard will be a behemoth in the field of mass customized investment solutions in short order – if it isn’t already.

The highlight of the day, however, was my meeting with Mr. Bogle. Such a decent man. I’m told that aside from his annual summer vacations, he’s still in his office bright and early most days. Seeing as he had a heart transplant 18 years ago and is now 88 years old, it should be obvious that the man has a fondness for what he built and quite literally dedicated his life to.

I normally think of myself as being a composed person who seldom gets star-struck or carried away, but it was really difficult for me to be anything less than a wide-eyed sycophant at the meeting. Our discussion ranged widely and delved into matters of corporate governance, a few “war stories” about things in the past – and a fair bit of earnest concern about the industry’s future, as well. Mr. Bogle also honoured me by asking a few questions about myself and my practice. He seemed genuinely interested and I can only hope that I didn’t do anything to embarrass myself.

All told, it was a truly delightful experience. Like I said, there are a number of benefits associated with being a portfolio manager!

John De Goey is a portfolio manager with Industrial Alliance Securities (IAS) and the author of The Professional Financial Advisor IV. The views expressed are not necessarily shared by IAS, which is a member of the Canadian Investor Protection Fund.