The 'Vanguard effect' and our commitment to investors

10 May 2017 | Topical insights


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Bill McNabb

Investors are dealing with swift currents of change. They have more information, more choices and more challenges than ever before in navigating global financial markets. We spoke with Vanguard Chairman and CEO Bill McNabb to talk about the changing investment landscape and how Vanguard is responding to meet our clients' needs.

Vanguard has been a prime beneficiary of the surge of interest in low-cost investing. Do you think Vanguard's leadership in this area is the primary reason, or are other factors at play?

Mr McNabb: Low costs are certainly one factor, but there's much more going on. At Vanguard, low costs aren't a recent phenomenon. We have a 40-plus-year history of reducing costs, and we're glad that we've led efforts to educate investors on the importance of low costs to long-term investment success. Better still, that trend has caught on, as fees across our industry have fallen. Some call that 'the Vanguard effect'.

We've seen record net new investment into Vanguard over the last several years, and the pace has been accelerating. We're humbled by that and gratified, because it demonstrates that our way of investing is making sense to more and more investors. It's also a recognition in the marketplace of just how difficult it is to beat low-cost, highly diversified portfolios.

But to truly maximise investors' chances of success, it takes more than low costs. It takes deep experience and high-quality funds that can be used to build balanced and diversified portfolios for the long term. It takes smart investment research that leads to sensible asset allocation plans. And it takes giving clients sound insights into the investing and economic environments that will prevent them from making mistakes that can take years to repair.

We've always been about lowering costs, but we've also always balanced that with constantly improving the experience for our clients.

Do you expect Vanguard to keep reducing costs?

Mr McNabb: It's tempting to chalk up every expense ratio reduction as a shot fired in some industry 'fee war', but this really is business as usual for us. We've been lowering costs for four decades – and we'll continue to do that. That's a win for investors.

But, again, this isn't a race to see who can offer the lowest fees. Low fees are just one component of a successful investment portfolio. The way I look at it is: Low costs are necessary, but they aren't on their own sufficient.

You also need to give investors the right tools to make informed decisions and encourage greater savings rates, prudent asset allocation and discipline. That's where Vanguard has really spent a lot of time and resources.

Let's talk about those tools. What is Vanguard doing to improve clients' experiences?

Mr McNabb: Our investors come to us for a couple of reasons. They expect the investment product to be very high-quality, low-cost and enduring in nature. But there's also an expectation that we're going to provide the right kinds of services to help them make the best decisions so they can stay informed about what's happening both within their portfolios and in the world at large.

To address our clients' expectations, we've invested heavily in technology. I think of that technology investment as doing three things:

First, we want to make life easier and more convenient for clients. That's where a lot of technology resources have gone in recent years. You can see that in the enhanced experience for our clients on mobile devices and on the web.

Second, technology, at the most basic level, can provide efficiencies that allow us to do more for our clients at a lower cost. We often refer to this as using the scalability of the business for our clients' benefit.

Third, we deploy technology to help our crew [employees] help our clients even more. We've had to make a lot of changes internally to accommodate growth because the numbers are at such an unprecedented level.

There's an emerging fourth category that is attracting a lot of our attention. I'll call it infrastructure. We're a large employer, at this point nearly 17,000 people worldwide, and we run complex operations. In order to manage risk appropriately, in order to manage our people appropriately, we need to really invest on the 'insides' of Vanguard. Two areas come to mind: cybersecurity and investment management. In short, we've invested considerably to protect clients' confidential information and assets, and in our investment management infrastructure to be more effective and efficient in managing your money, with the objective of improving returns.

It's clear that investors are getting advice from multiple sources. Regardless of how they obtain it, what do you think constitutes good investment advice?

Mr McNabb: A good adviser should be focused solely on what's in the best interest of the client.

To provide good advice, that adviser – whether it's a human being, a computer algorithm or a combination of the two – has to know the investor's goals. That seems really simple, but when you press many investors, they actually have multiple goals. You have to get a clear understanding of what those goals are and where they may compete with one another. The overall asset allocation of an investor's portfolio is also crucial. Anybody who's providing advice has got to get that right.

Another important role an adviser can provide is discipline. The very best advisers can keep their clients from overreacting to market 'noise', and they can add a ton of value by systematically rebalancing their clients' portfolios and informing clients how to react to different external factors. To me, that part of the advice equation is what adds the most value because you can get the goals right, you can get the asset allocation right, but if the client reacts to noise and changes the allocation, you undo all the value.

The last thing I'd say is that good advice can't be so expensive that the cost erodes the value of the advice. In a lower-return environment, which we expect over the next decade or so, costs for investors will become even more important.

Our recent growth – and that of some of our competitors – has triggered a debate about whether indexing is becoming too big. How do you respond?

Mr McNabb: Regarding the indexing question broadly, the short answer is no. Indexing represents only 15% of global equity market value and a little more than 3% of fixed income market value. And it's a fraction of actual trading volume.

To me, what the flows into indexing represent is a realisation in the marketplace of just how difficult it is to beat low-cost, highly diversified portfolios. As an aside, we've actually seen clients invest a fairly large amount of money into some of our actively managed funds, both on the equity side and the fixed income side.

The debate shouldn't be indexing versus active; it's low cost versus high cost. If you're going to be successful as an active manager – and we do think there's a place for active – it needs to be low-cost active. We've always been a champion of that.

Important information:

This document is designed for use by, and is directed only at persons resident in the UK.

This material was produced by The Vanguard Group, Inc. It is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

The opinions expressed in this article are those of the individual author and may not be representative of The Vanguard Group, Inc.

Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.

Issued by Vanguard Asset Management, Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.



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