 This session, a moderator, to my left, the esteemed John Luskin, host of Twitter Live, and also runs our Bogle Heads Facebook page and Bogle Heads Twitter, is a fee-only advice-only certified financial planner from sunny San Diego, California. He helps a lot of do-it-yourself investors. He is a prolific writer with articles published in peer-reviewed journals and magazines. He's been published in the Journal of Financial Planning and others. He did his master's thesis on university endowment funds, where he showed that university endowment funds would do a much better job managing their endowments if all they used was a portfolio of passive index funds, which those very smart people don't really want to hear. But anyway, so he is recognized as one of the leading financial planners in the industry by Investment News Magazine. He's been featured in The New York Times, Wall Street Journals, and other publications. So I give you your moderator, John Luskin. And you're ready. Folks, welcome to Vanguard Deep Dive. As you know, I'm your host, John Luskin. And I'm joined by Alec Lucas and Ben Johnson, CFA. Alec is a strategist within manager research for Morningstar Research Services. Ben is head of client solutions at Morningstar Asset Management. Today, we're talking about Vanguard. I'll start by reviewing Vanguard's past, present, and future before opening up to audience questions. Let's start with the past. Alex, can you start us off by giving the audience a little bit of a refresher on the history of Vanguard, how it came to be, and the motivation behind it? Well, thank you for having me. We'll use the mic. It's probably a little easier to hear. Thanks for having me. Very excited to be at a Boglehead's conference. I expected to see bobblehead dolls on the tables. But they're very expensive. Inflation, inflation. There you go. There we go. In terms of Vanguard, I think that one of the themes I've noticed, so I started covering Vanguard in the... I started investing in Vanguard in the late 90s, but joined Morningstar in 2013 and then have been what's called the Vanguard parent lead since the first half of 2018. And I think one challenge that Vanguard sometimes faces is that there's a tendency to compare the new Vanguard with the old Vanguard. And I actually wrote a piece on this. And I think sometimes there is a tendency to gloss over some of the details about what happened early on in Vanguard's history. So as is probably well-known among this group, but perhaps not as well-known as it should be, is that there's a very close relationship between Vanguard and Wellington that persists to this day. But what became the Vanguard effect of lowering fees and promoting indexing, it arose in the midst of a very fierce battle that Jack Bogle had with four Boston-based rivals. And remember that Vanguard is based in Philadelphia, so there's probably some regional differences there. And initially, when Vanguard was founded in September of 1974, the first day of operating was May 1st, 1975. And after seven months of negotiation with his Boston-based rivals, Bogle said that he got one-third of what he called the fund loaf. Now, what did he mean by that? If you think about what a mutual fund does, it does fund administration, it does investment management, and it does distribution. So Vanguard at its inception only had a right to fund administration. But Bogle, being in some respects the perfect example of Adam Smith's invisible hand, his competitive zeal leading to the good for a lot of people, because what he essentially did is back then, you had a commission-based distribution system, so he went no-load. And then, because Wellington retained investment management rights, he launched the first retail index fund because he argued it was unmanaged, because it merely tracked an index. And so initially, this incredible innovation, the democratization of what we call now beta for your average retail investor, it was his only play to launch a new fund. And so there's this wonderful thread, if you kind of go throughout Vanguard's history, that a lot of these innovations were born in the midst of this career-defining conflict that led to Vanguard's founding. And there's other things we can go to, but I think that it's important to really understand the history that what became Vanguard in this playbook of low fees and indexing really emerged in the midst of that conflict. Fantastic. All right, let's bring it to Vanguard today. Now, Vanguard is moving into new spaces where it wasn't involved before. Advice with Vanguard's personal advisory services, including private equity and direct indexing. Ben, what should Boglehead's make of Vanguard moving into these new areas? Well, I think to pick up where Alec left off, like the Vanguard effect is pervasive now, right? We see it everywhere. We see it emblematic in the fact that market exposure, beta is free just about anywhere you can go. The entry point, in many cases, is as low as a single dollar. If you show up at Vanguard, if you show up at Schwab, if you show up at Fidelity with a dollar, you can get a zero-fee total stock market index fund today. So I think that is absolutely to be lauded, but what that creates is basically like a flat competitive space. So I always use the analogy of like competition between two corner gas stations, right? So what are they selling? They're selling something that's going to make you go at the end of the day. Market beta is going to make your portfolio go full stop. So you need that beta to lift your assets over time, ideally at a rate that outstrips inflation. Well, when that becomes a commodity, I pay nothing or effectively nothing for total stock market exposure, total bond market exposure, my three-front portfolio. It can be had for literally nothing. How do I differentiate? Well, we arrived here because one corner gas station was taking a penny off of the gallon of gas. The other one was, the other one was. It's free now. So what do we do? Oh, we've got these fancy new detergents in our gas that will extend your engine life. We call it smart beta. Cool. Is that really going to work? Maybe it does. Maybe it doesn't. But for the time being, it's a way for us to differentiate our gasoline from the person kitty corner from us. Well, that's not really working. So what do we do now? Well, if you fill up here, I'll give you a car wash for $3.99. Okay, that's a differentiator. Well, if you fill up here, I'll give you a car wash and a pizza. So what you see, not just at Vanguard, but really across the tier one asset management industry, is an expansion of the breadth of their offering because they have to, because their core offering at the end of the day has become what's effectively a public utility. It's just market exposure. Awesome. I can't underscore how awesome that is, that that is free, that that is investable to anyone at a minimum investment of a few bucks. Fantastic. Let's celebrate that. But now we've got to move on and say, well, how are we going to differentiate? We're going to differentiate along the axis of how do we package different investment strategies and what are the different types of investment strategies that we offer. So in the packaging, what we've seen is ETFs have become the choice of a new generation. The investment vehicle that literally the founder refused has really become the cornerstone now of this organization. You see differentiation along the lines of strategies. So you've got at the core low cost beta humming along. You've seen an effort that's had not so much success in factors. You see concentrated discretionary active portfolios coming to play. And that is all to compete. That is all to ultimately serve different needs across a massive client base. There are some 30 million different investors that Vanguard's serving around the world today that don't necessarily just want a tank of gas, but might want to carwash a pizza, a different detergent in their gas that's going to extend their engine life. And that's, I think, just part of a natural evolution. And to the extent that they've done it in a way that resonates with their past, focus on the investor, focus on bringing down costs in this space. You see that in the advice offering. I think that resonates, right? That's true to their legacy. But that's not to say that there might not be missteps at some point along the way. And for those who aren't investment nerds, beta just means we're investing in the Vanguard total or other low cost total stock market index fund. Yeah, I would add to the differentiator point that I think Ben is exactly right on. There is also, I think, an altruistic element to it. Vanguard does see itself as trying to democratize asset classes. And so I think that the private equity efforts can be seen in that light as well, even as it is to also serve institutional clients. And I think it's something that's perhaps unrecognized, but if you think about indexing when Vanguard launched the first index fund, at the time it was an institutional strategy. It actually wasn't working too well. So it's quite fascinating that Bogle launched what became the Vanguard 500 as early as he did. The first effort at indexing, if you've read Robin Wigglesworth's book, and it's also covered in Peter Bernstein's Capital Ideas, the first effort at indexing occurred with the Samsonite Pension Fund, I believe it was 1971. And they tried to equal weight the New York Stock Exchange. It was a disaster. In 1973 there was a sampling approach to the S&P 500. Those were institutional portfolios. Bogle in 1976 launches the first retail index fund. Think about computing power back at that point. It's much less robust. So if you have an institutional accounts, the money flows are much more predictable and they're bigger. And so that's why sort of understanding the origin of Vanguard and what it did, it's this tremendous revolution that at the time had no guarantee of success and was slow going in the early days. And so I think there's a lot of insight to be gleaned from understanding Vanguard's present in light of its past. Ben, I know you have a lot of expertise in index fund investing and ETFs. Tell us your thoughts on Vanguard moving into direct indexing. Yeah, direct indexing I think fits within this idea of expanding choice for the end client along the dimension of sort of delivery. So direct indexing, I don't know if anybody remembers the old Mike Myers skit where he played Linda Richmond in Coffee Talk on Saturday Night Live. Direct indexing is neither direct nor indexing. So let's discuss that. So what direct indexing is really is a way to optimize first and foremost for tax considerations. So people who are in high tax brackets who have a lot of money, oftentimes who are bringing like a concentrated stock position to bear, look at direct indexing as a way to build a portfolio around that concentrated stock position that brings in diversification that keeps the tax man at bay as long as humanly possible. Pretty cut and dried, it makes sense in those use cases. But that's not everyone. That's not me. I don't have that problem. And I would argue most investors don't have that problem. But for those investors that are looking to achieve something very specific, it is a very good tool to do exactly that. And it's also something where Vanguard's got an offering, BlackRock's got an offering, JP Morgan's got an offering. So it's emblematic of the level of competition right now among the large asset managers for your money. They want your money because that's how they make money. And if they don't have like the shiny new toy that their friend across the street has, like they're at risk of either losing your money or getting tough questions from you. Like, you know, hey, like BlackRock has a perio. Like, you know, what do you have to offer me? So it's, I think important to understand a lot of this in the context of like competition among these large asset management firms. And, you know, Vanguard like is, you know, one of the three now 900 pound gorillas in this space operating not just here in the U.S. but globally against chiefly BlackRock and in State Street. Earlier beforehand, we were rehearsing for our talk today and I mentioned Vanguard has higher fee active funds in their personal advisory service offering. And then, Alec, you mentioned relatively yes but compared to some of the other funds that are out there, compared to other funds, it's still relatively low cost. Can you tell us more about your thoughts on Vanguard making this move? Yeah, so as a number of you probably know, Vanguard launched some advice select funds in 2019, late 2019. And so they're only for personal advisor services clients. And this was a subject of considerable discussion at Morningstar, especially between John Reagenthaler and myself. You know, it reminded, it certainly reminds some people to kind of the old wirehouse approach where, you know, you sort of have this proprietary product and you're trying to get it to investors. But if you think about the simple fact of sort of democratizing investing and the playbook that Vanguard has followed very well is in indexing, if you had a very simple model of indexing, you invest in the index fund, you get the market average, and then you beat most people because you have lower fees, right? Well, there's always going to be a right side to the distribution where you have some superior active management that is going to occur, but it's hard. And so what Vanguard did is it launched these high conviction active strategies and it's priced them pretty competitively for actively managed funds, but even if you include the 30 basis point charge for personal advisor services, it still falls below the active median. And there are clones of those strategies. Don Kilbride has run one. He manages Vanguard Dividend Growth, which is a fund that's done very well. The more concentrated version of the fund, he's run as a separate account since 2008, and it has actually beaten, even if you add in the fees, it's outperformed the slightly more diversified Vanguard Dividend Growth fund. But I think it's important that they're offering things that are price point that is competitive and it is selective, but not everyone can outperform. Is it Lake Wobegon, where everybody's above average? Yeah, that's not going to happen, right? But everyone can be averaged through indexing. Let's bring it to a topic that's come up quite a few times already. Just today, ESG investing. So earlier on the panel, I got quotes from the panel on that subject, and these are shortened because I put on Twitter, and as you guys may know, there's some pretty limited character accounts there. So here's from Dr. Jim Dolly on ESG investing. There are better ways to make a difference. Jason Zweig, you should be skeptical. Dr. Bill Bernstein, cut from a much longer quote, ESG is a scam. And then lastly, if you want to make a difference, you want to own the stock, and that's from Rick Ferry. So naturally, Vanguard's moving into ESG investing as well. Ben, I'd be curious to hear your thoughts on that. Yeah, so I planted a tree in my backyard a few weeks ago, and that tree over the past two weeks has already sequestered more carbon than every ESG fund under the sun ever will. So you have to understand what is the transmission mechanism between your investment capital and the cause that you believe in. And in the case of public markets, as a public equity investor, unless you're participating in new share issuance, there's no direct connectivity. You're passing shares back and forth to one another. And if anything, by virtue of not owning the shares, and I think this probably came up too earlier, I sorry, your tweet, you forfeit the only connectivity you have, which is either directly or indirectly to vote proxy to try to effect change at the level of that corporation. So the link there is tenuous at best. That said, it's a real choice. It's a real preference, and I don't think you can discount that. I think you've seen, again, Vanguard and all of its competitors position themselves to expand, again, along this axis of choice that is the investment strategy. Does it incorporate ESG criteria or does it not? More choice for people who want that choice. That's great. But to do that at scale is exceedingly difficult because ESG considerations are inherently personal. We heard Bernie Malkiel talk about the disagreement even among ESG ratings providers. And it's going to differ if we go around the room here. My ESG emits the stock of the guy who, the company who has a CEO that stuffed me in a garbage can in high school. That's my ESG criteria. That's going to be different if I ask somebody else in the audience. That would be G for governance. It's difficult to do for scale. It is in theory, you know, potential use case for something like direct indexing, which we were talking about before, that allows people to kind of go up and down, starting from an index portfolio, and apply those sliders that say, you know, I want to, you know, not own companies that don't take into consideration animal welfare, like whatever the case might be. But it's, you know, at the end of the day, like exceedingly difficult. What we've seen is, you know, more and more asset managers have tried to compete on this vector and, you know, get into this like, you know, old school, like Mr. Olympia ESG green muscles flex off, right? Like kind of hulking out on ESG is that there's been blowback. And there's been blowback for all the reasons that I've just described, because there's fundamental disagreement on what is ESG good? What is ESG bad? And we could both take like very different sides of the exact same coin. So, you know, I think it's going to continue to be out there. I think investors continue to need, like, true, like, you know, direction in terms of like, who is actually like walking the talk. But, you know, it's, again, a dimension of preference. It's a strategy type. People are going to be into ESG the same way that there's like diehard quants out there that, you know, are still hodling small cap value stocks, like through, you know, multi decade drought. You know, there's a saying in Spanish. This is my first ever panel response where I will try my hand at speaking in Spanish. But, Senor Marth, my sophomore high school Spanish teacher, was always fond of saying por todos sus colores y sus sabores. So, everyone has their own different colors, their different flavors. ESG is one of those flavors. Wonderful. Yeah. All right. Let's bring it to growing pains. Alec, looking at Vanguard, they're not in Melbourne anymore. What does Vanguard's geographic expansion mean for their investor owners? Well, I think, you know, Vanguard opened up its first global office in, it was in Melbourne in 1996. So, they have a history of being overseas, but growth has been slow. I just talked to a Melbourne-based reporter. They're trying to revivify an attempt at launching a platform for Australia's superannuation retirement funds, basically. Apparently, they had done that in years past and had not worked. So, it's been pretty slow going, I think. They've been in Canada, for example, since December 2011, and only in May of 2018 launched their first active funds. So, what is Vanguard's playbook overseas? What you find when you talk to Vanguard, and I'm not an entire expert on Vanguard's entire non-U.S. operations, but my understanding is that in a lot of these countries, it's an oligopoly in terms of distribution, and it's been hard to break in. So, 95% of Vanguard's overseas assets are in passive strategies, and they've been trying to basically grow their business to exchange traded funds and more recently through advice. And in its early days, I think they did use U.S. investor assets to subsidize their expansion efforts overseas. They would argue that that's also helped their investing to have more of a global firm. But it's been slow going. The last number I heard, this was in 2020, so it's quite dated, but it was, I think it had $550 billion overseas by contrast until the market downturn. I think they had about $8 trillion in assets globally. So, at that point, probably under $1 trillion of that is overseas. But taking a measured approach, and I think trying to grow overseas, and I think Vanguard does harken back to how long it took, for example, indexing to take off. If you look at Vanguard's assets and you look at the division of active and passive, it is not until in the aftermath of the global financial crisis that AUM indexed assets take off relative to active and Vanguard. So, if you think about Vanguard, what built Vanguard is actually the Wellington Fund, is what subsidized a lot of its early efforts at indexing. Yeah, indexing is like the overnight success that's been decades in the making, right? And internationally, what you see, I think, which is most interesting is we talked about the Vanguard effect before. The Vanguard effect almost unfast-forward in certain markets and notably when they first listed their FTSE 100 ETF in the UK, this was years ago, BlackRock was already present there, had a multi-billion-dollar competitive offering, tracking the exact same underlying index and said, we're holding the line on fees even though the Vanguard ETF was charging a tiny fraction of what the iShares ETF was charging. We have superior liquidity or clients worry about ETF liquidity, not fees. They held out for, I think it was all of like 18 to 24 months before finally they cried uncle and had to cut their fee to, I don't remember if they matched or undercut the Vanguard ETF because they were losing share because people saw Vanguard coming and knew exactly what the Vanguard playbook was and quickly their competition had to respond. You've seen that happen in Canada too where they've launched single-ticket like ETF allocation portfolios and it's a market that's very difficult for outsiders to penetrate because so much of asset management product is distributed through bank branches in Canada. So I show up to a BMO branch in Canada. When I'm 16, I open my checking account. I do all my business with them until the day I die. My heirs come and walk away with my assets after I've expired. Well, Vanguard has forced competitors in there to launch nearly identical product at nearly identical or lower fees just by virtue of their presence in some cases. So the Vanguard effect is the real deal and it's replicating itself in all these new markets where they show up and build a presence. And even at $550 billion or so overseas that's like a top 25 asset manager in the U.S. so it's a significant footprint. As much as we talk about Vanguard as being this indexing behemoth they're also one of the largest active managers in the world and even what is a relatively small in Vanguard terms foot side the U.S. would be a pretty big U.S.-based asset manager. So beforehand we asked for questions on the various Bogle Ads communities including the Bogle Ads forums and one topic came up multiple times and I'm sure a lot of folks are going to be able to guess what this is and that is going to be growing pains and customer service. So here is one question from Makephile from the Bogle Ads forums who writes it'll be interesting to hear from the Morningstar analysts whether they think Vanguard's current cost structure and ultra-low expense ratios would even allow for Vanguard to return to a higher level of service. Okay, I'm prepared for this question. I have a prop. I feel like as a rite of passage if you're going to be in Bogle Ads you need to read Character Counts by John Bogle or his thesis. I've read both. I think I would not say the thesis is a page-turner. So this is a compilation of his speeches. It is not indexed. I came from academia. I am used to indexes. I made my own. The right-hand column because early on in my Vanguard lead days at Morningstar guess what topic kept coming up? Customer service. So I have a personal index of every reference to customer service problems throughout his speeches. Let me give you a small selection. Service quality not uniformly high. That's page 69. Processing traumas. Page 73. Service problems. 107. Learning from service setbacks. Processing overload. Shareholder complaint letters. And perfection as a goal and so forth. So I think that the way to think about Vanguard is it has a frugal culture and high-touch customer service is probably never going to be at strength. Anecdotally, we have heard that investors who pay the 30 basis point charge for personal advisor services are for the most part fairly satisfied with the services. But I myself have experienced long-hold wait times and some of my own disasters from customer service standpoint, including when we changed over our money market account. I rarely wrote checks for my money market account. So I wrote earnest money for our housing down payment. It was a short sale because I lost a bunch of money on a condo that I bought in 2005. So I was like, we're going to make it up by buying a short sale. So you can imagine you want the earnest money check to cash, right? On a basic level. I happened to also, out of the same money market account, write a check to the home inspector. It bounced. And the home inspector got back to me luckily in time to wire money and replace what then subsequently bounced as the money market account. But what happened, they changed the brokerage platform circa 2016 and didn't let me know or at least didn't make it clear enough that you needed to re-register for check writing privileges and all your old checks wouldn't work. And I got Vanguard to pay me back the money I got charged for bouncing that check. And they did. But I think that a theme throughout Vanguard's history is, if you sort of think of the field of dreams, quote, if we build it, they will come. Well, indexing really did take off, especially in the aftermath of the financial crisis and Vanguard's growth has been phenomenal and there are challenges. I well say anecdotally, we get lots of complaints from customers and I have duly passed those on to Vanguard myself and said I'd like to talk to Tim Buckley about how they're handling this. Because my impression is you have a lot of the people that helped make Vanguard what it is today whose financial needs have gotten more complicated to very long wait times on the telephone. And I think it's unfortunate and I think they could do a better job with it to be quite blunt about it. So those are my initial thoughts on customer service, but a point Ben has often made is if you think about having 30 million investors, you could satisfy the lion's share of them, but still just on an absolute basis have quite a few missteps. And anecdotally, there is a morning story analyst who had a family member pass away and had to like deal with all these accounts and said the people that ended up being the most helpful were Vanguard. We don't get written to about that, right? So I do think you have to keep in mind how many customers it is they serve as well as the challenge of keeping up with the growth they've experienced. I would just add that despite that it's interesting like if everybody gets real quiet, you can actually hear money headed to Malvern right now. So like through the end of September, I just did the map based on our flows data, something like 300 million dollars a day, you know, flowing into Vanguard funds. So at the end of the day, everyone here, you know, Vanguard investors are going to vote with their wallets and they're continuing to vote for Vanguard. And as Vanguard clients or otherwise consuming Vanguard product through other platforms, right? You can be a Schwab client and buy Vanguard asset management products. I'm a Schwab client that buys Vanguard asset management products. The other thing you have to look at too, and you mentioned Thrift, Alec, I just looked back at the envelope, the number of employees per investor served, this is just based on the public data out there. Fidelity has nearly three times as many employees per investor as Vanguard does. And they have three times as many employees per investor as Vanguard does because they're monetizing their investors in different ways that Vanguard hasn't historically monetized their investors, earning interest spreads on cash sweep accounts in a number of different ways. So, you know, foundationally, I think I can credit David Booth with saying that the product of the asset management and wealth industries at the end of the day boils down to trust. And I don't think there's any more trusted brand in this industry, probably than Vanguard, that shows up in survey work that's been done. But as a result, you know, they're under the microscope, and this is, I think, something that's not going away, barring probably more significant investment in something we've talked about them with them for years and obviously something, you know, that shows up in the Bogleheads forum. In addition to, like, which composite, like, fiberboard you can build your deck out of that is least likely to burn your feet in the summer. So, like, credit to the Bogleheads forum, I love this place. That I could, like, look up anything from tax location to, like, what should I build my deck out of so it won't hurt my feet. Like, that's amazing. It's like the ultimate hitchhiker's guide to the universe. Before bringing it to the audience, let's talk about the future. Eric Bolchino's keynote speaker for this year's conference takes a stab at dispelling many of the myths of index-funded investing and how it could distort markets in his book, The Bogle Effect, yet with massive fund flows, Vanguard receives daily 300 million. How big is too big for Vanguard? I, when I came here and registered, I saw that they were offering, I don't know if it was good, I have it and have read it, the last book at Bogle Road, the 2019, Stay the Course. You know, towards the end of that book, he does mention this question of size and if you think about, especially Vanguard in relation to Black Rock and then State Street and the growth of passive assets, there's real questions about size that they take very seriously. I actually was visiting with Black Rock in New York the other week and to bring it back to the topic of ESG, they were talking about how they're trying to, and Vanguard's doing the same thing, they're trying to take a very serious approach to voting proxies. And then they will get kind of very silly proposals from say an overly zealous environmental group that will say put on, try and put a proposal for a natural, for an oil company or a gas company, you know, I'll stop drilling, this is an exaggeration, but it's not far off, you know, we'll stop drilling entirely and plant trees and they will not support the proposal and then they will, the next year, reward the proposal to say something like we would like you to stop drilling and consider planting trees. And so they're just complaining about all these proposals that aren't that helpful and I said, well, have you ever talked to Vanguard to try and sort of band together and get it so that there aren't so many silly proposals that you're essentially having to vet and vote against and the answer essentially was that there would be real concern about the perception of collaborating given the amount of stock owned in public companies between just those two firms. So I don't, the basic answer to the question is I don't know how big is too big, but it is a real issue going forward and one that I think Bogo was rightly concerned about. And that issue like has a few different facets so one of those is, you know, the growth of indexing and what does that mean for market efficiency like price discovery, you name it, if there's just $380 billion, like plus, you know, $380 million, sorry, going towards Malvern, going into index funds incessantly, like what does that mean for like finding two sides to agree on like, you know, what the price of Apple stock is at the end of the day, like these concerns are as old as time. I don't know if anybody ever read, what is it, I'm going to get its name wrong, John Brooks Business Adventures is the book anyway. So if you go back to like the go-go years of the 60s, people were worried about the quote unquote mutual fund situation. So retail mutual funds were just becoming like truly a thing being made widely available and incumbents were worried that, you know, once the you know what hit the fan that all these new mutual fund investors would go flocking towards the exits at the same time and markets would, you know, be upended cats and dogs would live together, whatever, like that didn't pan out. So like, these are just like, it just feels like the same fears keep getting recycled and like new clothing. I would apply that to the growth of indexing, you know, where it becomes potentially more concerning, I think is around common ownership. So, you know, Vanguard, BlackRock, State Street, Odin, ever larger amount of an ever larger number of companies, not just in the US, but globally, like what are the implications for corporate governance and something that, you know, Bogle wrote about in his last op-ed in the Wall Street Journal, you're already seeing the industry like try to move to cut that off at the past BlackRock announced earlier this year that it is handing over the ability to vote proxies like based on certain policies to some of its institutional investors. Just this morning, Charles Schwab announced that it's going to pilot for three of its index portfolios to ETFs and in index mutual fund, a survey of investors in those funds based on like their preferences as to how they might vote the proxies for the firms that are owned in those portfolios. At the end of the day, it's the investor's asset, right? That vote. So it's incumbent upon the asset manager has a fiduciary obligation to vote those proxies in a way that's sensible. I think that proxy voting is going to come ever closer to the end investor now or most investors are going to know what to do with it or care to do anything with it. Probably not. I mean, raise your hand if you're like a regular proxy voter. I know we've got super duper sample bias here too because these are like some of the keenest investors in the planet. Yeah, but absolutely. And Jim's point up front is if there were an easier way to engage and be more uptake, I don't disagree with that and engage in a way that says broad spectrum, these are the things I believe in or believe against. Apply that across a thousand stocks and the Schwab 1000 ETF go. But I think that's where it becomes potentially more concerning and you start to bump up against even just ownership constraints that are real and regulatory. And anytime you put that question across to the asset managers, it just mums the word because this represents at some level of growth like real enterprise risk and the potential of like even bringing up like antitrust conversations. Just to add one other thing, I think it was in 2018 that Vanguard changed it so that the sub-advisors, the external sub-advisors it hires to manage its equity assets can vote proxies. So previously Vanguard voted those proxies. They did that more to help the managers in that case influence the companies they were investing in, but it also has the effect of decentralizing the voting and I think Ben's right on. It is the proxy voting and the ability to vote proxies that I think is the biggest concern about size. Folks, if you want to ask your question to the panelists, go ahead and step up front or raise a hand and okay great, I'm going to hand you the mic, wonderful. Hi there. A question on your Vanguard inflows, data you're in support of the customer service, does your data, I just don't understand the little clarification. When you do your fund inflow data, are you measuring funds flows into the funds themselves regardless of where the trade was executed? Because I think that's what the issue is, Vanguard the company as my trading platform and customer service versus fidelity or Schwab is my trading platform, because Vanguard funds at Fidelity. So that's what I'm trying to clarify because the customer support is a company versus the Vanguard branded fund which can be traded anywhere. That is a measure irrespective of the origin of that money. Irrespective of whether it came from a Fidelity client or Schwab client or an advisor or an individual, that's just we know that that money has wound up in Malvern. We don't know how it got there. We just know it's being managed there today. So that's a good question. I think part of it too is I'm very fond of the bogalism, you get what you don't pay for, yes in investing, but I think even Jack, maybe this was when he had heart surgery and relented that sometimes you do get what you pay for and when it comes to someone operating on you, that's the case. I would say when it comes to service offerings in general, that's also the case. You can't show up to McDonald's and expect like white tablecloths and a major D. I think you've got to take the good with the bad at the end of the day. So probably it's similar to this. Could you explain Vanguard now moving accounts from mutual fund accounts to brokerage accounts and why is that such a complicated thing and why do they have to do it? I'm not sure I can answer that in every respect, but I know they started that initiative in 2016 and as I explained earlier, I experienced my own hiccup with that. I think that it was much more about expanding the brokerage platform and just the technology of it is my basic understanding and I know that I believe it was this year. They sent a notice to legacy investors on their old platform that it was time to move. So I think it's just about updating technology and if you think about it if you just think about where the asset management industry is today, I have a two and a half year old her grandparents great grandparents give her more money than she needs as a two and a half year old so I take that money and she now has a globally diversified portfolio and also because I will say that my children love McDonald's I do not love McDonald's myself but they each own one share of McDonald's and so the point being that if you think about where investors are to open a brokerage account and get a diversified global portfolio in 20 minutes well that takes a certain amount of technology and so I think it was about transferring their investors to more technology enabled platform and they did that did take years for them to do that I would just add in a related vein you've seen a similar shift you know sometimes there's a carrot sometimes there's a stick away from legacy mutual fund share classes into the ETF share class where the ETF share class has been appended to the mutual fund and part of that is just trying to address the issue of like individual shareholder record keeping which exists and can be costly in the case of say the admiral share but exists does not exist in the case of the ETF where shareholder record keeping takes place at like an omnibus account level so you've seen that even just in the way that the ETF share class in many instances was repriced the basis point lower than the admiral share and yeah that repricing is reflective of the cost savings on Vanguard's end you have servicing a client that's an investor in the admiral share versus the ETF share so I think it's similar I'd like to hear your thoughts on the debacle with the target retirement funds capital gains distribution does anybody at Vanguard care do they what do they think about these lawsuits that are now being launched because of this issue is this sort of thing going to happen again what are your thoughts on that debacle yeah so that was a subject of considerable discussion for those of you that don't know Vanguard opened up a cheaper version of a target date fund and investors instead of lowering the cost of the current fund and institutional money sort of flocked to the new fund and caused a huge capital gains distribution now if you're investing in say 401k or Roth IRA if your money's through that route the capital gains distribution does not matter for you but if you took and in some cases there was some criticism of Morningstar as well for not making it clear that investing in a target date fund and the glide path can be an inefficient thing to do if it's taxable money so I think that that was a reminder to Vanguard that you know sometimes I think this is the disadvantage of their size you know the vast vast vast majority of their target date assets are in retirement accounts so it didn't matter however you know when you're talking the huge asset bases that are in some of those funds even if it's a few basis points it's still a lot of money and it's a big deal to a lot of people I actually had an hour long call with somebody based in Pittsburgh to talk about that because he was so frustrated both at Vanguard and at Morningstar because he felt like we could have done a better job of warning investors about that potential and I think he was right you know it's something to be aware of and it's something that we need to be as thoughtful as we can be about the you know the positives as well as the potential negatives for investing money especially when you segmented it into tax advantaged and taxable accounts so I do think that Vanguard got the point but it is an illustration of some of the collateral the way that I phrased it when I wrote about it is this is a collateral effect of the fee war you know Vanguard basically is the reason we have fee compression in the asset management industry and some of their biggest rivals and so there's been you know I think it's especially between Vanguard and Fidelity in lowering their target date fees one will lower and then the other will lower so I think their competitive Zeal got the best of them we've talked about ESG investing and Ben you mentioned how with the traditional approach to ESG investing you are giving up one means of influencing those companies and then we've also kind of tangentially talked about proxy voting what do you think about the other newer approach to ESG investing like engine number one's vote ETF yeah so there's engine number one and now there's even like anti-engine number one so there's another you know firm out there that is like trying to vote Contra the way engine number one might vote you know I think it's interesting but again it's difficult to scale it assumes alignment at the level of the end investor like certainly there's there's a market for that we see that hundreds of millions of dollars in VOT's the tier of the engine number one fund but there's also you know tens of millions of dollars in the Contra fund I think at the end of the day like the scalable solve is as I mentioned before to like get more of the vote as close to the end investor as possible in a way that overly burdens them you know and doesn't make things incrementally more complicated that's ultimately my take as it pertains to proxy voting the other element that we didn't touch on is like you know more impact oriented like thematic you know portfolios that look to invest in companies that are going to capitalize on like the energy transition or even you know certain fixed income managers for example PIMCO does like direct placement so like they will have like a firm that is doing a green project issue them a bond they will own that bond in their portfolios like that linkage as I described it before between capital and causes immediate it's direct there you know whether that green project winds up being not green like XPOST like at some point in time somebody thought asbestos was a great green building material right like wow was that wrong so you know there's still going to be a bit of uncertainty did that get to your question hopefully okay thank you and I would just add on the impact front Vanguard co-opted essentially a Bailey Gifford positive impact fund I think it was last year I don't think it was this year I think maybe it actually changed it got rebranded as a Vanguard fund this year so they have that as part of their offering and I would say one thing to think about Vanguard with respect to ESG is an important development is a guy named Dan Newhall who for many years oversaw Vanguard's manager search and oversight committee which evaluates all the sub-advisors they hire both internal and external so if you put your money in actively managed assets that group is the one that picks those sub-advisors and it will also be Vanguard's own in-house investment capabilities have to compete with those external managers so a big question we've had is what is the role of ESG when they evaluate those managers well a guy named Matt Piro took over as head of that group and he had recently been appointed head of their global ESG product lineup so I think that there's going to be a bit more of a consistent vetting of managers from the standpoint of ESG on a go-forward basis but I think Vanguard will always make room for a firm like Prime Cap Prime Cap is one of their longest sub-advisors as you may know and they came out with a statement a couple years ago on their approach to ESG and they said it took them forever to come up with it and it's maybe four or five sentences and the key line is they struggle with the idea that definitive objective rationales exist by which you can vet these companies that said Prime Cap's next analyst I hired is somebody with tremendous ESG experience so there is something to be said for active managers paying attention to risks from the lens of ESG but I think Vanguard will always leave room for managers that are not necessarily leading with ESG but see it as one Wellington manager one Wellington management manager put it in the heart of the mosaic my question is more about Morningstar than about Vanguard I'm wondering what's going on with your accounts I've always for a while I was a paying customer and then I learned that I could use what I really want and use a lot as the watch list and and now I've discovered all of a sudden I've been lured into being a subscriber again to Morningstar it arose out of a frustration I've had with Vanguard's reporting if I try to list all my funds on one page okay so it's more than four the easiest way I found to do that was using a watch list that I would keep from month to month and update I think that's a great question for Bendy answer I was actually looking down at Christine oh sorry we got two minutes so is your question as it pertains to that like watch list function where it exists because I know we've had some changes to our it seems to be it seems to be changing with relation to the free accounts versus the paid subscription 200 dollars a year we're going to meet once I get off stage and we will figure this out for you great thank you you're on the fly I'm sorry I have a simple question won't take very long every time that I call Vanguard and I get a rep who doesn't really seem to understand the simplest question or every time they bounce one of my checks I wonder about the opacity of the compensation structure of the executives at Vanguard and I'm wondering if anyone in your shop has discussed that I've asked Tim that directly as you may know some of you may be familiar with Dan Wiener who runs the Vanguard independence I'm like on the exact terminology but he famously reconstructed Bogle salary and published it which made Bogle quite angry I think though that Vanguard there's certain things Vanguard could improve in and I think transparency is one of them in certain respects and one of them would be compensation for executives they have said to me basically they don't want to disclose it because of competitive pressures but you know if you think about your average well every publicly traded company you want to find out what the CEO makes you can you know Bogle has made much out of you can't serve two masters and being very critical of publicly traded asset managers but that's one respect in which publicly traded asset managers have a leg up and it's been raised is what I can say and I'd like to see him do it folks that is going to be it for our time today thank you for Ben Johnson and Alec Lucas for joining us today we will see everyone at 630 down in the banquet hall downstairs same spot as last night until then enjoy your break