As CEO of Vanguard, the biggest asset management company in the world, Bill McNabb is one of the influential people in finance. I’ve twice been to Vanguard’s Pennsylvania headquarters to interview him — first, for the Sensible Investing TV documentary Passive Investing: The Evidence, then for the follow-up series How to Win the Loser’s Game. Since then, Vanguard has been on an extraordinary run, attracting record inflows for four years running.
So, what does the man at the helm put that success down to? Has it fundamentally changed the nature of the fund industry? And what does it mean for financial advisers?
This exclusive interview is the latest in a series of articles previewing next month’s Evidence-Based Investing Conference in New York, at which Bill is one of the headline speakers.
Vanguard has had an extremely successful couple of years, especially in the US. What do you put that down to?
Everything starts with our unique client ownership structure. Throughout our history, it has driven our client-first culture, our four decades of lowering costs for clients, our advocacy for investors, and our commitment to improving the funds and services we offer.
Do you think Vanguard’s success and the growing popularity indexing in general means the rôle of the adviser is changing? If so, how?
The nature of advice is changing. It’s no longer about great stock tips or picking the right funds to beat the market. It’s about giving investors the appropriate asset allocation and diversification, keeping them on track to reach their goals, and having important conversations with them along the way as questions arise and big life changes occur.
Do you see the rise of robo-advice as a challenge to traditional advisers?
The answer is both yes and no. Robo-advice is not a fad. It’s here to stay and it will put a downward pressure on the price of advice. Advisers must adapt. As portfolio construction is becoming commoditised, the best advisers are adopting fin-tech elements into their own practices, enabling them to cultivate deeper client relationships and focus on more complex aspects of planning.
You said recently that advisors need to “seize the moment to tell their story”. What do you mean by that?
Advisers who demonstrate the value they add above and beyond straight technology offerings will have tremendous opportunities. For example, about 10,000 Baby Boomers in the US will retire every day between now and 2029. They will face complicated, emotional questions, many of which can’t be answered adequately though a computer model. There is great power in conversation and advisers are in a prime position to help people navigate some of the most important decisions they will make.
What did you make of the controversial Bernstein paper which claimed that passive investing is “worse than Marxism”?
Indexing is the most efficient vehicle to ever connect everyday investors to the broad capital markets. Consider the fact that you can invest $1,000 in a total world stock ETF that invests in virtually every publicly traded company on Earth, and your fee to do that is less than two dollars. Indexing has democratised investing by making it more accessible to all.
As a company, Vanguard believes active management has a place. But has it grown too big? And do you expect the sector to shrink in size over the next few years?
Active management will always have an important place, but high-priced active management will not. We’re seeing that play out in the marketplace right now, as investors are showing a preference for index strategies and low-cost active funds. I don’t foresee that trend reversing.
Why not join Bill McNabb and other industry thought leaders like him at The Evidence-Based Investing Conference in NYC on November 15th? To register, follow this link.
In the meantime, here are interviews with some of the other speakers and panelists:
Pro investors are prone to all the same biases as everyone else – Clare Flynn Levy
What will be relevant a year from now? — Tadas Viskanta
Fees for active investing more than 100% — Charley Ellis
Complex markets don’t require complex solutions — Ben Carlson
Gender imbalance in investment management needs urgent attention — Blair duQuesnay
There are more than 600 factors, but only a few worth looking at — Larry Swedroe