From CEO to Startups: Masters in Business with Former Vanguard CEO Bill McNabb

Barry speaks with William "Bill" McNabb. He's former chairman and CEO of Vanguard and now sits on the board at UnitedHealth, IBM, Axiom, and Altruist. They discuss his 30+ years at Vanguard and his career after leaving the company, working in the board room and with startups in fintech and more. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  At Brookfield, we believe you can own wealth that's measured in generations. Because true ownership looks beyond today and beyond cycles. For 125 years, we've built long-term wealth through expertise, discipline, and a clear vision for the future. Providing investors access to alternative strategies built for what's next. Brookfield. Own what's next. Learn more at Brookfield.com/own. This is not an offer to sell or investment advice. Investing involves risks, including loss of capital. Past performance is not indicative nor a guarantee of future results. Please review performance and offering materials before investing.

• 0:37Speaker 01

  Some people treat ChatGPT like some kind of smart search engine, and some use it to get work done. ChatGPT Work is a new way of working in ChatGPT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs, and scattered information that you have to grind through to turn into something useful can just become something useful. Put ChatGPT to work on your most ambitious ideas and projects. Get started at ChatGPT.com by selecting Work Mode. Available on Plus and Pro Plans.

• 1:20Speaker 02

  Who says Americans don't build big things anymore? Through innovation, Venture Global is not only building some of the largest energy facilities in the world right here in the United States, but delivering American energy at a fraction of the cost and a fraction of the time. So while others are busy talking, we're busy building. That's Venture Global. That's unstoppable energy.

• 1:51Speaker 03

  Bloomberg Audio Studios. Podcasts, radio, news.

• 1:59Speaker 03

  This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

• 2:06Barry Ritholtz?

  This week on the podcast, another extra, extra special guest. Bill McNabb was CEO and Chairman at the Vanguard Group. He had been with the firm for 30 years, helping to take them up to trillions of dollars. We've spoken to him a couple of times in the past. He discusses his post Vanguard career, the boards he's sitting on, all the fintech startups and venture capital he's working with. I thought this conversation was fascinating, and I think you will also. With no further ado, my sit-down with William McNabb. Bill McNabb, welcome back to Bloomberg.

• 2:45Speaker 05

  Thanks, Barry. It's great to be here.

• 2:47Barry Ritholtz?

  So, so the last time, the last two times you were here, you were running Vanguard Group. I'm curious, how does a guy who rode at Dartmouth, taught Latin, and coached at the Harvard School end up running the world's largest mutual fund company?

• 3:05Speaker 05

  So, there's an old saying that it's better to be lucky than smart.

• 3:09Barry Ritholtz?

  My mom used to say that to me all the time.

• 3:12Speaker 05

  And that, that really did apply. I got very lucky, Barry, in terms of just opportunities that happened to come across, you know, come my way. And I had incredible mentors who sort of helped take those opportunities and make more of them than maybe they would have been otherwise. And, you know, one thing led to another.

• 3:32Barry Ritholtz?

  Huh, really interesting. So, teaching Latin and coaching, what does that teach somebody like you about leadership that you were able to apply across three decades at Vanguard?

• 3:45Speaker 05

  Yeah, you know, I think that the two big things, and, and I was very fortunate to work for somebody at Vanguard who really lived this. And I'll come back to that in a second. But the power of we versus I. I was coaching a rowing team. And no matter how good the individual athletes were, if they didn't really exist in order to make the boat go faster, you weren't going to win. And we had to really get that across to people. And, and you know, that collective drive for success actually is incredibly applicable in the business world. I think the other thing, maybe a little more subtle, is you lead by example. And, you know, some of the people who talk about it

• 4:27Speaker 05

  and they theorize and, you know, all these fancy sayings. I'd rather just watch somebody do what they do really well. And if, you know, if they're building good teams, just that example of how they do it is, is really worth emulating. I worked for Jack Brennan, as you know, and you've had Jack on here before as well. And Jack really lived that. Like, for me, when I got to Vanguard, the we versus I was very apparent where he was driving the firm. And then no one led by example better than, than Jack. And, you know, when you've grown up in that world as a coach and an athlete, and then you get it reinforced professionally, you know, early in your career,

• 5:11Speaker 05

  it becomes a way of thinking.

• 5:13Barry Ritholtz?

  Yeah, big fan of Jack Brennan, loved, loved what he did. When you joined Vanguard in 86, it was obviously a fraction of where it was today. It was far less than a trillion dollars. And even in the mid 80s, I mean, that was the beginning of the bull market that started in 82. You had Peter Lynch and the Fidelity Magellan Fund. Berkshire Hathaway was on the rise. Stock picking was on the rise. I guess I could say indexing was a fringe idea. What did the firm look like back in the mid 80s?

• 5:50Speaker 05

  Yeah.

• 5:50Barry Ritholtz?

  Did, did you have any idea what was coming your way over the next couple of decades?

• 5:55Speaker 05

  This is why I said it's really better to be lucky than smart. I did not see this incredible explosion coming. What attracted me to Vanguard was I was working here, you know, for what's now JP Morgan Chase in New York, and was getting a little frustrated with a lot of things and decided it was probably time to go. And one of my really, again, one of my mentors said to me, "Go find a place where the values match your own." And when I went in and interviewed with Jack Brennan and then Jack Bogle, you know, I found, I, it was like, wow, this is so different. And it was, there was tremendous appeal. And so I did it really based on gut and intuition. At the time, and so when I interviewed with Jack Bogle,

• 6:39Speaker 05

  the funny story was he, you know, he had data, pulled out a bunch of stuff, and he's like, you know, "We just crossed $15 billion under management, and I have no idea how we're going to get to 20. So I don't know why you would come here. You know, you're doing big things on Wall Street." And I didn't even really have a response. And then he went on, he goes, "But of course..." And for the next hour and a half, I got a lecture about everything that needed to change in the asset management business. I go home and my wife says to me, "How'd it go?" I said, "I don't know. I didn't say anything." But she goes, "Well, what are you going to do?" And I said, "Well, if he offers me the job, I'm going." Because there's just something like, there was the passion and the drive and the, you know, really contrarian view. So the early days, look, we paid as much attention

• 7:23Speaker 05

  to active management as Fidelity did, you know. So Fidelity had Peter Lynch and Magellan Fund. We had John Neff and the Windsor Fund.

• 7:30Barry Ritholtz?

  Sure.

• 7:31Speaker 05

  The great, you know, arguably one of the two or three greatest value investors in history. And, you know, Jack himself was very, you know, making sure that we were competitive. Money market funds were just taking off, and we got into the money market fund wars. So, you know, people will, you know, it's hard for people to imagine today, but yields were in, you know, 17, 18% at different times. And Dreyfus, Fidelity, and Vanguard were the three money market fund giants, you know. We each had a couple billion dollars, but everybody was comparing yields. And so, active management and the yield on the money market fund in the early days, those were like the big drivers.

• 8:11Barry Ritholtz?

  So, so my pet thesis, so to put this into context, 15 billion in the early 80s, just about 15 trillion today. That's just a crazy, crazy thousandfold increase, 10,000-fold increase? That's just an insane run. My theory is the late 90s, the scandals, the crashes, the ANO scandal, the accounting scandal, the IPO scandal, all, one after another. I think a lot of people just threw their hands up and said, "You know what? Just buy me the whole market. Let me know when it's time to retire. Let me know when I have enough to retire." Is that oversimplifying what happened? Or is that really a factor?

• 8:50Speaker 05

  I would say that's, that's the psychological part of it. There was also the math part of it, which is, on an after-tax basis, index funds beat 90% of active equities over any long, any rolling 10-year period.

• 9:04Barry Ritholtz?

  Anything more than a decade.

• 9:05Speaker 05

  Anything more than a decade. So if you were a long-term investor and you wanted to win, you indexed. And so, you know, it was, it was interesting to me as a participant in the market. I'd listen to our competitors, and they talk, "Well, you know, indexing's having its moment, but it's going to cycle out. And, you know, stock picking will be back any day." And the math was just overwhelming. That when you, and, and the real reason, and this was Jack Bogle's, again, oversimplified discussion, but essentially, if you have two big parts of the market, one that's actively managed and one that's passively managed, they have to add up to the market.

• 9:42Barry Ritholtz?

  That's right.

• 9:42Speaker 05

  So the average on the active side's going to be the market because you know the index side's going to be the market. And then you take costs into account. All of a sudden, you've got, you've got arithmetic working in your favor. So for us, there was this, it's simple, it's, it's easy, it's low cost, and it works. And, you know, I think that was such a powerful thing. And, and our shareholders, Barry, as, as you know, because you've, you've been a student of the game for so long, they stayed with us. Way longer than other investors stayed with their firms. You know, on average, I think it was three X. So the the average duration of a relationship was three X that of the industry.

• 10:27Speaker 05

  That's an incredible advantage in terms of just, you know, how you think about your business.

• 10:32Barry Ritholtz?

  So you you become CEO in August oh eight. Two weeks later, Lehman Brothers goes kaput. Remind us what was happening in that era. What was that transition like stepping into the lead role? Just as it looks like the world is going to hell. And what was that experience like?

• 10:54Speaker 05

  Yeah, so, um, look, you know, it it in the darkest days. I mean, everyone was questioning whether the system would survive. So different than other crises we've seen. People really looked at like, will the market actually survive this? And we had a deep seated belief it would. And so we we we kind of had this bifurcated way of looking at the world. Like each and every day, what were we doing to to better assure our investors? That somewhere down the road, things would get better. And they had to stay the course like the worst thing you could do was to panic. Unless you really believe the world was going to end. And we had to do so.

• 11:38Speaker 05

  We met twice a day, every morning and every afternoon. And we went through, you know, transaction by transaction, fund performance, everything you needed to, you know, try to assure our investors. At the same time, we knew that the world was going to be different. Regulation was going to be different. The competitive landscape was going to change. And maybe even some of the business models were going to change. And so we started laying the groundwork for all those changes. And, you know, just to give you a couple of tangible examples, the role of advisors. So at that point in time, the independent advisor channel, which again, you've lived this,

• 12:21Speaker 05

  was a really tiny fraction of advisors. Most of it was, you know, the the big brokerage firms. And they were primarily commission driven.

• 12:30Barry Ritholtz?

  Right, all transaction.

• 12:31Speaker 05

  All transaction based and essentially conflicted because the more you trade, the more money they make, the more you trade, the more you lose from a performance standpoint. So we believe that the world, this would accelerate the move to asset based fees and that it would be a very different model. The the other one for us, we we really thought this would this would accelerate indexing for all the reasons that you cited earlier in terms of just, hey, it's safe. It's just by the market. And again, the math was overwhelming. Even during a downturn, stock pickers did not outperform the index.

• 13:08Barry Ritholtz?

  Which is the claim before, just wait till the next downturn and you'll see how well stock pickers have done.

• 13:14Speaker 05

  So we we we knew that so we we we started to make moves around those changes. We knew the regulations were going to change a lot. And we also knew the competitive landscape. And frankly, we didn't get that all right. We knew somebody would end up with iShares because Barclays Bank was under such duress. I didn't see BlackRock doing it. Just didn't anticipate that was.

• 13:39Barry Ritholtz?

  What a great buy for them. It was spectacular.

• 13:41Speaker 05

  It was phenomenal. I mean, you know, one of the stories we don't talk much about, we actually were a serious bidder on it until the regulators came in and changed the game and then we had to back away.

• 13:52Barry Ritholtz?

  Really? How come BlackRock would be allowed and Vanguard wouldn't?

• 13:56Speaker 05

  We were we were allowed, but they they wanted to pair their institutional business with the iShares franchise. We didn't want anything to do with that institutional business because we were all mutual fund retail based. So and and again, all the credit in the world to, you know, Larry Fink and his team and and BlackRock and what they did. But, you know, it was interesting. I had a director come to me after all this and he says, so you're six months in the job. You come to us about doing our first acquisition ever. It's a very large check and I, you know, over a beer sometime, I can tell you about all the nuances that when I.

• 14:35Barry Ritholtz?

  I'm looking forward.

• 14:35Speaker 05

  It was pretty cool.

• 14:36Barry Ritholtz?

  Yeah.

• 14:38Speaker 05

  So what's that tell you about ETFs in this advisor channel? And we took that back. And that's when we really went all in on ETFs and all in on really serving advisors better. And that was a huge change then.

• 14:52Barry Ritholtz?

  I I want to circle back to advice and target date funds and and just stay with oh eight oh nine for another moment.

• 15:00Speaker 05

  Sure.

• 15:01Barry Ritholtz?

  The first time you were on, you told the story about how you had figured out how nervous your employees were. And do you recall what I'm talking about?

• 15:13Speaker 05

  Yeah.

• 15:14Barry Ritholtz?

  Remind us of what that environment was, how it was affecting clients, staff, and and what your solution to it was.

• 15:21Speaker 05

  So, you know, um, all of our competitors were laying people off left and right because transaction volumes had just gone away and.

• 15:30Barry Ritholtz?

  Other than selling.

• 15:31Speaker 05

  Other than selling. And you're, you know, if you're, you know, the classic mutual fund company in that in those days was probably sixty five, seventy percent equity. And equity market peak to trough was down fifty percent. So your revenue was down thirty five percent.

• 15:46Barry Ritholtz?

  I think it was fifty seven, fifty six, something like that.

• 15:49Speaker 05

  Like March ninth, I think.

• 15:50Barry Ritholtz?

  Yeah, that's exactly right. It was identical to seventy three, seventy four in terms of.

• 15:55Speaker 05

  Yeah.

• 15:55Barry Ritholtz?

  The drawdown.

• 15:56Speaker 05

  So, um, our people were incredibly nervous and people were wondering. So we went to our people and we got our board's blessing to do this and said, there will be no redundancies, no layoffs. All we want you to do is be flexible and we may need you to move from one role to another, wherever the client demand is and whatever the need is. So we ended up doubling down on service and doubling down on fixing problems that, you know, we had service, you know, everybody has service issues. We took, if we had excess people, we turned them loose on those problems. And the theory was you couldn't cut your way out of this.

• 16:37Speaker 05

  And if you had people nervous about their own jobs, how are they going to reassure clients about the world's not ending? And they were going to feel conflicted. And I think it really worked because.

• 16:52Barry Ritholtz?

  Everybody exhaled.

• 16:53Speaker 05

  Everybody.

• 16:53Barry Ritholtz?

  Took a deep breath.

• 16:54Speaker 05

  And we and we went all in on educating our, you know, our our clients and people, you know, our service levels were incredible. We got a lot of, you know, we we got a lot of positive reinforcement back from the clients. So I I think strategically, it was one of the most important things we did during that period.

• 17:13Barry Ritholtz?

  And and then out of the depths of the financial crisis, you guys leaned hard into the advisor channel into building your own advisor space and then target date funds, which I believe came out of an off site meeting around the crisis. Tell us a little bit about that redirection expansion and and the new post crisis direction for Vanguard.

• 17:37Speaker 05

  So it really was, um, you know, we did this, we we did this very existential exercise with Jim Collins, the great business writer.

• 17:47Barry Ritholtz?

  And. Good to great, is that right?

• 17:49Speaker 05

  Good to great. He had he had done the two books that were really influential on our thinking were Built to Last. How do you build a company that can be a leading company for a hundred years? And then Good to Great. And so we asked ourselves, in order to be great, you know, we we thought the first step was, what's our why? Like, you know, why do we exist? And, you know, we had a mission statement and it was very long and a lot of adjectives and adverbs. And we took a team and and we we mixed the team. It was a couple of senior people, but all the way down to the front lines. And we said, come back with why do we exist? Why do we have a right to exist? And it was really simple. It was take a stand for investors, treat them fairly and give them the best chance for investment success.

• 18:34Speaker 05

  And that latter one in particular, target date funds, you do the math. You you we can, we could demonstrably show that investors who went in target date funds did better than those who didn't. Doing our own advice program.

• 18:49Barry Ritholtz?

  Mm hmm.

• 18:49Speaker 05

  Low cost advice that's, you know, tax sensitive, really focused on asset allocation and very disciplined in rebalancing and not letting people, you know, in a sense harm themselves, that, you know, that that's where advisors add tremendous value. So, you know, build, you know, build that. So these things Barry were, they, they were in a sense logical outcomes target and, you know, the, the target date thing was interesting. We had people arguing about, wow, it doesn't really take risk into account, you know, just setting a date. And we're like, every risk quiz I've ever seen gets the same answer.

• 19:30Barry Ritholtz?

  Mm hmm.

• 19:30Speaker 05

  Moderate. Like it's, you know.

• 19:33Barry Ritholtz?

  My experience has been when you do the risk tolerance surveys with investors, what you really find out is what's been going on in the market for the past six months.

• 19:41Speaker 05

  Yeah, yeah, yeah.

• 19:42Barry Ritholtz?

  So if it's doing great, they're much less risk averse. And when it's in the crapper, suddenly, no, I'm not an adventurous investor. I'm a low risk investor.

• 19:51Speaker 05

  So when we really looked at the math, those quizzes were adding no value in terms of the asset allocation decisions we were making. So we were like, just take it out, make it simple. Like, tell us when you're going to retire, and that's the fund we're going to put you in. And, you know, again, I mean, you track all this, the fund performance of those funds versus unmanaged accounts in 401k, it's superior.

• 20:11Barry Ritholtz?

  There's a reason that has become the default.

• 20:15Speaker 05

  Yeah.

• 20:15Barry Ritholtz?

  Holding in 401ks, because before that Richard Thaler driven behavioral change was made, people would just leave money in cash and when the market would run away.

• 20:27Speaker 05

  Guaranteed investment contracts and money market funds were the default options of choice. And I started out as guaranteed investment contract product manager at Vanguard. So like, I knew this world really well. We had, and it's funny you mentioned Thaler. So Shlomo Bernarese and Dick Thaler did all of the seminal work on applying behavioral finance to 401k plans. We sponsored a lot of their research.

• 20:50Barry Ritholtz?

  Oh, really?

• 20:51Speaker 05

  We actually worked with them and it really helped us think about automatic enrollment into 401k plans, automatic escalation of your contribution.

• 20:59Barry Ritholtz?

  As your salary increases.

• 21:00Speaker 05

  As your salary increases. And then, you know, the default option being a target date fund.

• 21:04Barry Ritholtz?

  The, the more you can automate a process, the less opportunity there is for human bad decision making and, and

• 21:12Speaker 05

  Yeah, totally.

• 21:13Barry Ritholtz?

  Poor intervention.

• 21:13Speaker 05

  Totally.

• 21:14Barry Ritholtz?

  Um, so last two Vanguard questions before we move on. So Jack Bogle was at Vanguard pretty much your entire tenure. What was your relationship like with him? I know he wasn't necessarily a big fan of things like ETFs or overseas investing. Tell us a little bit about what was like to work with Jack for 30 years.

• 21:37Speaker 05

  You know, Jack, Jack, I, I, I chuckle because I learned so much, you know, my first, one of my early roles, it's my second role at Vanguard, I sort of fell into running product development, which was really whatever Jack thought up for, as a new investment product, you went and did the homework and then, you know, went and executed. So I got to work with him a lot in those early days. He was incredibly demanding, very fair, but incredibly demanding. And I had my share of, you know, do I need to get my resume in order? Because he had been, you know, a lot of pen marks on a paper

• 22:18Speaker 05

  or whatever. But when I became CEO, you know, I got a nice note from him right away. And then a few months later, I got like a 20 page, like, series of things we should be thinking about. And, you know, I'd say all well thought out, about half of which I said, nah, that's, we're going to do something different. But, you know, he wasn't, he certainly was not shy. And so you're right, you know, ETFs, global, global funds, international investing in general, was not a huge fan. However, you know, I had a couple of great people

• 23:03Speaker 05

  on my staff who just constantly went to see him and, you know, talk to him and, and, you know, really take his wisdom. And in the end, if you watch some of his last interviews on ETFs, he'd say, unless you do it like Vanguard does it. Like, you know, and, and he, he slowly moved there. I think the other thing, you know, so international, he, he, the team in Australia, which is our, was our biggest international presence when I retired, and I think it still is. Jack made a, a, a visit there, you know, after he'd retired, but he was still running the Bogle Research Center. And it was epic.

• 23:46Barry Ritholtz?

  Oh, really?

• 23:47Speaker 05

  They, they talk about it still to this day.

• 23:49Barry Ritholtz?

  Wow.

• 23:50Speaker 05

  About how impactful it was to have the founder there. And he was so proud that the message was going beyond our borders. And so, you know, again, there was

• 24:01Barry Ritholtz?

  Still, still no real traction in Europe, starting to lean that way. They, they have just such a different, I don't know if it's the fact that their retirements are more or less.

• 24:13Speaker 05

  Yeah.

• 24:13Barry Ritholtz?

  You know, covered.

• 24:14Speaker 05

  State, state driven. And the banks control everything there for the most part. Although in the UK, there's been, we've had a lot of success in the UK.

• 24:21Barry Ritholtz?

  Yeah, it's, it's shifting there before everywhere else. So, so last Vanguard question. I recall just at the tail end of the financial crisis, you guys crossed a trillion dollars and $2 trillion by the time you retire. I don't know if it was four or five trillion dollars.

• 24:41Speaker 05

  A little over five.

• 24:42Barry Ritholtz?

  Five trillion dollars. My question for you was your first day of retirement, what was it like waking up saying, I'm not responsible for thousands, millions of investors and trillions of dollars?

• 24:55Speaker 05

  You know, it was mixed emotion, Barry. You know, so much of my career was spent in front of clients. You know, I helped build our 401k business in the early days. So I got out to see employee groups on behalf of the plan sponsors. So I probably had more interaction than anyone had ever had with direct. I missed that a lot. Those, I mean, I just had so many incredible experiences and relationships. And I missed our people. You know, one of the great things in this, you know, both Jack Bogle and Jack Brennan were so good at, they did not like hierarchy. And they

• 25:36Speaker 05

  didn't like this idea that, you know, we didn't have executive dining rooms and, you know, special parking places and all that kind of stuff. Because we believed everybody's job was really important. And, you know, we all used to love to walk the floors and, you know, see what people were up to and talk to them. So I missed that and I missed the clients. But, you know, at the, at the same time, the team that was there, I'd worked with most of them for 25 years. I felt good about that team. And it was like, go knock it out of the park.

• 26:09Barry Ritholtz?

  You, you left the place in good shape. Coming up, we continue our conversation with Bill McNabb, former CEO and chairman of the Vanguard Group, talking about his new roles in the boardroom and working with startups. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

• 26:34Speaker 00

  At Brookfield, we believe you can own wealth that's measured in generations. Because true ownership looks beyond today and beyond cycles. For 125 years, we've built long-term wealth through expertise, discipline, and a clear vision for the future. Providing investors access to alternative strategies built for what's next. Brookfield. Own what's next. Learn more at Brookfield.com/own. This is not an offer to sell or investment advice. Investing involves risks, including loss of capital. Past performance is not indicative nor a guarantee of future results. Please review performance and offering materials before investing.

• 27:11Speaker 01

  Some people treat ChatGPT like some kind of smart search engine, and some use it to get work done. ChatGPT work is a new way of working in ChatGPT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs and scattered information that you have to grind through to turn into something useful, can just become something useful. Put ChatGPT to work on your most ambitious ideas and projects. Get started at ChatGPT.com by selecting work mode. Available on Plus and Pro plans.

• 27:55Speaker 06

  Hey, what's up, guys? It's Haley Bailey. Okay, I need to tell you about something. I just got YouTube Premium. It's got tons of awesome features like offline downloads, so I can download my favorite videos before I travel and watch them whenever I don't have Wi-Fi. Because we all know airplane Wi-Fi is the worst. I get ad free, I get background play, and there's like a ton more in there. You should try it. If you like YouTube, you'll love YouTube Premium. Try it now for two months free at youtube.com/premium.

• 28:22Speaker 07

  If you like YouTube, you'll love YouTube Premium. Hi, I'm Sean Evans from Hot Ones, and I want to tell you about YouTube Premium. It has offline downloads, so you can watch without Wi-Fi. Background play, so you can lock your phone and it still plays, baby. Oh, and it is completely ad free. Yes, I said it, ad free. Try YouTube Premium for two months free at youtube.com/premium. Trial eligibility varies. Terms apply. Cancel anytime.

• 28:56Barry Ritholtz?

  I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Bill McNabb. He is the former CEO and Chairman of Vanguard. The firm now runs, I don't know, is it $14 trillion? Some wild number. So you step down as CEO at 60 with the firm pretty much running on all cylinders, doing great, great team. As someone who just went through the process of succession planning, I have to ask you, how did you know it was time to step down? How do you think about doing succession correctly? There are so many examples of firms that get it wrong.

• 29:39Speaker 05

  So, you know, one of the things about, again, I had a great mentor on this. My predecessor, Jack Brennan, you know, Jack retired when he was, I think, 54.

• 29:52Barry Ritholtz?

  Stayed as chairman for a few years, right?

• 29:55Speaker 05

  Just a year.

• 29:56Barry Ritholtz?

  Okay.

• 29:57Speaker 05

  But he had run the firm for 12 years. And I couldn't believe it when he told me he was going to do this and I was going to succeed him. And I asked him why. And he said, look, he goes, somewhere in that 10 to 12 year range, if you've done a decent job, people stop pushing you and they stop questioning you because you've been right more than you've been wrong. And he goes, that's not healthy. And the ability to reinvent the firm or to really push for innovation gets harder because you really need a collective wisdom to do that. And, you know, that's where the art is, Barry. But I felt like the team was really strong. I was seeing signs, you know, we'd had a lot of success.

• 30:37Speaker 05

  So I was seeing some of those signs and it was, okay, time to let a new generation see what they can do and, you know, leave the place in a good spot and then go.

• 30:49Barry Ritholtz?

  Did you set up like a detailed plan as to your retirement? Or was it just evolving organically?

• 30:56Speaker 05

  So, I had a detailed plan as to how, you know, how we were going to do the transition at Vanguard. And we worked really closely with our board on that. And, you know, there were steps. In terms of my own thing, I was like, I didn't want to think about it. I thought I'd wait until I was out. I had a year where I was board chair still. And I'd originally said I would do that for as long as three years. And, but after a year, it became clear, like, the firm's really doing great. Like, there's no need for this. But that year, I did a ton of travel for us, you know, all around the world, seeing clients, regulators, whomever. And I also did a lot down in DC because there was a lot of regulatory

• 31:41Speaker 05

  stuff going on. And so I had a lot of travel time. So that's when I started to think about, okay, what's, what am I going to do at this next phase? And, you know, I described this phase as sort of the, there's like, three parts to it. You know, there's family and fun. There's governance. And then there's, I'll call it, I call it pay it forward, but mentoring and, you know, helping develop a new cadre of leaders and so forth. And, you know, I've been pretty, I won't say systematic, but I've tried to be careful. I've probably overcommitted it a couple of times in different things. But, you know, you try to feel your

• 32:20Speaker 05

  way through that. And the family and fun stuff are the passion things. The governance for me, you know, we, I had a opportunity to co-write a book on governance with Ram Shram. And, you know, we, we did, we did the book and we talked to everybody. Like, it was, it was so much fun, you know, talking to Warren Buffett about, you know, how's he think about governance? Just incredible. And Dennis Carey was the third co-author, by the way. And we, so I did that. And that led to, you know, leading, co-leading the NACD's Blue Ribbon Commission on the Future of the American Boardroom. And I do work

• 33:05Speaker 05

  with CECP, which is CEOs for Corporate Purpose, you know, Daryl Brewster's organization, which does incredible work on governance as well. So I had this whole sort of academic thing around governance going on. And then got the opportunity to serve on two, you know, very large public boards where, you know, you're on the other side.

• 33:27Barry Ritholtz?

  So, so let's talk about those boards. IBM and United Health Group, two giant companies, so different, and each going through very different transformations. How do you shift from being a CEO to being a director? And what can a board actually accomplish other than just responding to crises as they come along?

• 33:51Speaker 05

  You know, I think, I think the board, I think there's sort of three broad categories that the board has to lean in on. You know, the hardest thing being an ex-CEO is you're used to, like, running things. And you can't do that. Like, there's a line between management and governance for a reason. And, you know, you try to be very aware of that. But I think where you can lean in is how, if you think about, at the highest level, what you're doing is you're allocating capital. And you're allocating financial capital and human capital.

• 34:32Speaker 05

  So for us, the way we phrased it, and we did this in our book, by the way, you know, we said, look, focus on talent, focus on strategy, focus on risk. And from a governance standpoint, it all sort of boils up to those three things. And how do you help the company think through talent and culture? Do you have the right people to execute the strategy? Most boards want to go right to strategy. But, you know, I think you've got to really, you've got to really help the CEO and the C-suite team think about that culture and think about talent. You know, the best companies do this really well. You know, strategy, you

• 35:16Speaker 05

  know, strategy is, has really evolved. It used to be, you know, I can remember doing this with the Vanguard board early in my career. You know, you do a strategic plan, a five-year plan, and you, you know, it was all written down. Okay, this is what we're going to do. I mean, you've got to be so much more agile now.

• 35:33Barry Ritholtz?

  That's the great Mike Tyson quote. Everybody has a strategy until they're punched in the nose. It's got, it's got to be applicable to big corporations as well.

• 35:42Speaker 05

  So, you know, we talked, in talking about my Vanguard experience, I got it firsthand in 2008.

• 35:48Barry Ritholtz?

  Two weeks.

• 35:49Speaker 05

  Yeah. Because we had a plan. And that plan just, we just threw it out. And, and that plan was one of the coolest sets of objectives and things we were going to do different, completely off.

• 36:02Barry Ritholtz?

  The world totally changed.

• 36:04Speaker 05

  The world changed. And so I've tried to bring that mentality in the boardroom. And again, I'm very lucky that, you know, the two boards I serve on think that way. You know, I think, you know, IBM has gone through a lot of transformation. You know, our current CEO, Arvin, you know, he's really brought a strategic agility into the company. And, you know, if you look at the progress the firm has made since he became CEO, it's really very gratifying. Look, we had a, you know, we had a big sell-off last week or two, but we'll, we'll talk about what's happening in the markets. I think in the long run,

• 36:43Speaker 05

  what we're doing strategically makes a ton of sense. And again, we're trying to remain very agile.

• 36:51Barry Ritholtz?

  So, so let's stay with IBM, which has gone through, they began as a typewriter company, right? It's, people don't realize how often IBM has, one of the few companies that has successfully pivoted time and again to from, to mainframes, to PCs, to, so now the pivot is to hybrid, cloud, AI. When you think about all the different things they're doing, how do you help oversee this giant business model that's being rebuilt from the ground up?

• 37:25Speaker 05

  Look, you, you try to bring what experiences you have and you try to ask really good questions. And our board has got a breadth, I mean, when you look at the breadth in the board, different people bring different perspectives. So I think when I first came on the board, it was, the idea was, oh, you're going to bring a shareholder perspective, like, just the shareholder voice in the room. And that's true. But I'm also doing all this work now in the venture world. And so I'm living the AI life, big time. I'm seeing, you know, the pluses and minuses and everything else. So you try to bring some of that experience. We've got other people who are, you know, deep, deep, deep in, you know, different

• 38:08Speaker 05

  elements of technology. We've got other people who are really deep in terms of, you know, financial services and, which is a huge part of our customer base.

• 38:18Speaker 05

  We've got some people who are, you know, who will push on the science. You know, we have a former president of a major university, but her whole background was computer science. And so when we start talking quantum, like her eyes light up and I mean, she can go toe to toe with, you know, the research team on, on, on the quantum stuff. We're never going to know as much as the management team and the, and the people on the ground, but if you can ask the right questions, um, you know, I think that becomes really important.

• 38:48Barry Ritholtz?

  Let, let's talk about your other big company board seat, United Health. Really, I don't know any company that's gone through a rougher stretch due to outside forces. The CEO gets murdered, then there was the guidance issue, big leadership change, the former CEO comes back, Steve Helmsley, and now they're in the midst of a turnaround. What is the board's job in an environment where it's just one crisis after another and nothing that the company has necessarily done? It seems to be almost all, you know, random externalities.

• 39:25Speaker 05

  So you have to, this is again, going back to that agility thing. Um, you know, a lot of, a lot of business writers have talked about, you know, the need for management teams to, you know, have a more venture, more startup mentality, be, you know, be quick to pivot. Boards now have to be quicker to pivot. So we've had to pivot. We've had to think about leadership differently. You know, Steve coming back, huge blessing for us that he's ready and able and willing to do that. One of the greatest CEOs of our time, you know, most people don't know his name, but his ability to see around corners and make hard decisions and then go and execute. It's incredible.

• 40:07Speaker 05

  Um, but, you know, so we, but we, you know, that wasn't in the plan, Barry. We had, we had, we had to adjust pretty quickly. And, you know, what you try, again, what you try to do is you try to ask the right questions, you try to probe, um, you try to be supportive where you need to be supportive and you try to be challenging where you need to be challenging.

• 40:27Barry Ritholtz?

  So it's so fascinating to me that you're on these two giant public, publicly traded companies' boards. Vanguard is mutual. They have no outside shareholders. All their mutual fund investors are effectively the owners. There's no stock price to worry about. How different is it stepping into this world of public company directors? It seems like, uh, you know, such a, a giant shift.

• 40:57Speaker 05

  Yeah, it is. Um, and look, I, I think there are people who are in a lot of ways are way more qualified than I am. And, um, you know, you, you try to play, you try to be as helpful as you can be. Um, I think the one thing that Vanguard actually really trained me well for was to think long term. And yet at the same time, you know, our performance was measured every day, every week, every month. So we had this ability to do both. Uh huh. And, you know, again, Jack Brennan, Jack Bogle really drilled that into us. And I think our team did it exceptionally well. When you're, you know, the, the biggest aha is like the pressure on the quarter, right?

• 41:39Speaker 05

  Like, you know, you're, you're giving guidance, you're, you're, you're, you know, really thinking hard about your earnings calls and so forth. That was a new thing for me, um, cause again, I never had to do that. But the analogy is, um, you know, we were very, you know, long-term performance is made up of a lot of short-term performance. So I paid a lot of attention to short-term performance. I didn't obsess over it. I paid a lot of attention to it because it led to, you know, cumulatively it leads to long-term. So I've had to bring that same mentality and I've had to learn that here. It's a little bit different, um, but how to, how to be very focused on, you know, quarter by quarter by quarter and what we're doing and executing, but also the one part I, I

• 42:24Speaker 05

  do try to push is the, let's not forget the long-term.

• 42:27Barry Ritholtz?

  So I don't know anybody that's either on a, a board or is an investor that is remotely enthusiastic about let's stop reporting quarterly numbers. It seems kind of absurd on the, but at the same time, there's an increasing number of companies that say, we don't know the future. We're not going to give you guidance. That's your job as an analyst. Our job is to run the company. Reconcile those two with us.

• 42:57Speaker 05

  So I, I think the, so I think the move away from quarterly reporting is, you know, frankly, it's a false move. Like it's, it does not accomplish anything.

• 43:06Barry Ritholtz?

  I know they tried it in the UK and it did nothing.

• 43:09Speaker 05

  Did nothing. Um, you know, could you simplify reporting? Sure. Um, there, there's things we do that don't add any value to the investment community and simplify it. Um, I actually think quarterly reporting is very important. Like I think transparency about what's happening is incredibly critical. If you, if you, if, if the government were really, you know, the, the regulators were really serious about, about the issue, the guidance is where they would go. They would say, okay, we're not going to allow guidance. You know, what's interesting is, and I, I would have been in that camp, um, 10 years ago, um, you know, if someone, when I was, I, I went into probably a hundred boardrooms my last couple of years of Vanguard, because we were the largest shareholder and people

• 43:54Speaker 05

  would ask, you know, should we give guidance or not? I'd say, no, you don't need to give guidance. What you do see though, is there are situations where the street gets it so wrong that you, that you're, you're giving guidance to actually protect yourself from the street getting it so wrong. And that's the part that I've had to sort of balance in my own head. Because I, I never really understood that until I was in the boardroom. And then you see what people, you see the conclusions, some of the, the, the sell side in particular comes to, and you're like, whoa, that's not even remotely true. And then you have to guide them. But look, if, to me, the single biggest thing we could do would be, whether you give guidance

• 44:39Speaker 05

  or not, would be to really, um, hold companies accountable for providing long-term outlook. So what if you took one earnings call a year? I'm making this up, but we've talked about this at CECP quite a bit. And you devote, you know, you, you report on the quarter, but you devote it to, here's where we are against our five-year aspirations or our 10-year aspirations, whatever the right timeframe is. Here's how we're doing. Here's, by the way, you know, we told you last year that five years from now, we want to do X. The world's changed a little bit. We've got to pivot. So we're not going to do X. We're going to do two X. That to me would be a lot more productive in, in terms of getting people to think long-term.

• 45:23Barry Ritholtz?

  Really interesting. Last, last question on, on the boardroom. Are you ever in a meeting where, where somebody that's on the board realizes, oh my God, this is the former CEO of Vanguard. Hey, Bill, I got a question on my 401K. How often does that come up?

• 45:41Speaker 05

  Um, actually it, it happened a couple of times. Um, and you know, a couple of my colleagues in different boards were actually big 401K clients. So we, we, we did have good chats about that, but most of these guys are pretty sophisticated.

• 45:55Barry Ritholtz?

  Yeah, I can imagine.

• 45:56Speaker 05

  They don't need my help.

• 45:57Barry Ritholtz?

  Coming up, we continue our conversation with Bill McNabb, former CEO and chairman of the Vanguard Group, talking about startups and the future of advice. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

• 46:13Speaker 01

  Some people treat ChatGPT like some kind of smart search engine and some use it to get work done. ChatGPT work is a new way of working in ChatGPT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs and scattered information that you have to grind through to turn into something useful can just become something useful. Put ChatGPT to work on your most ambitious ideas and projects.

• 46:57Speaker 01

  Get started at chatgpt.com by selecting work mode, available on plus and pro plans.

• 47:04Speaker 06

  Hey, what's up guys? It's Haley Bailey. Okay, I need to tell you about something. I just got YouTube Premium. It's got tons of awesome features like offline downloads, so I can download my favorite videos before I travel and watch them whenever I don't have Wi-Fi, because we all know airplane Wi-Fi is the worst. I get ad-free, I get background play, and there's like a ton more in there. You should try it. If you like YouTube, you'll love YouTube Premium. Try it now for two months free at youtube.com/premium.

• 47:31Speaker 07

  If you like YouTube, you'll love YouTube Premium. Hi, I'm Sean Evans from Hot Ones and I want to tell you about YouTube Premium. It has offline downloads, so you can watch without Wi-Fi. Background play, so you can lock your phone and it still plays, baby. Oh, and it is completely ad-free. Yes, I said it, ad-free. Try YouTube Premium for two months free at youtube.com/premium. Trial eligibility varies, terms apply, cancel anytime.

• 48:02Speaker 08

  If you enjoy Bloomberg podcasts, you'll love listening to Bloomberg 991 FM in the DMV. Hi, this is Nathan Hager. Here in the district, the story is always changing. From the White House and Capitol Hill to K Street, Wall Street and the Fed, Bloomberg 991 keeps you connected to the news that's driving decisions in the nation's capital and around the globe. Check us out at 991 FM or stream us anytime on the Bloomberg Business app.

• 48:36Barry Ritholtz?

  I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Bill McNabb, former CEO and chairman at the Vanguard Group, now sitting on a few boards and advising private equity, venture capital, and startup firms, which is really quite the pivot from a mutual fund guy to a VC and PE sort of guy. What attracted you to those fields and some of the younger companies that you're advising?

• 49:10Speaker 05

  So, you know, two things I would say, you know, one, I had no experience in the private markets. Private markets are growing dramatically and I just felt like I need to understand this better. And, and, you know, for me, that was, you know, the chance to learn something new and hopefully help while you're doing it. But, you know, selfishly, I, I thought I was going to learn a lot and I've been overwhelmed by how much I've learned and how much more I have to learn. Second, during my last couple of years of Vanguard, we, we established a research group that, you know, and we began to talk about doing

• 49:51Speaker 05

  some venture investing ourselves, less not about making money or on behalf of our clients, but more just being in the ecosystem. And that all came about because we did a trip to Silicon Valley, took the whole leadership team, met with every large VC there, a bunch of their portfolio companies, and we walked away blown away by what we didn't know about our own business and what the future might look like. And so, to me, no matter what, where you are in the investment arc, if you will, understanding what goes on in the startup world is, I think, just important to understanding the bigger picture. And then the last thing

• 50:31Speaker 05

  I'd say, this is just a passion play, like, you know, our mission, you know, if you boiled everything down at Vanguard, we wanted to make the world a better place for investors like that. I mean, we got up every morning and afternoon. I'm lucky I get to do that. And the startups I'm working with, I believe very deeply that they have the potential to make the world a better place for investors. And if I can keep doing that for the next 20 years, I'm going to be really happy.

• 50:56Barry Ritholtz?

  So you're a senior advisor to Venrock. Are you helping them vet startups or ideas or founders? Like, what, what's your role with a fairly well-known venture firm like that?

• 51:12Speaker 05

  So, you know, the partner with whom I work the most is a guy named Nick Bym. He's incredible. He's just sees around corners. He's got 25 years of experience doing this. He's like, I learn something every time I talk to him. So Nick, Nick will get approached by a lot of different people. He will meet a lot of different people. When he gets something that's interesting, you know, I often get a call and it's like, hey, would you talk to these guys and see what you think? And so you and I both have good connections with Jason Wank at Altrus.

• 51:48Barry Ritholtz?

  Just a recent, full disclosure, by the way, not only a recent guest, Ritholtz Wealth Management uses Altrus as a custodian. The firm's venture arm is an investor in it. I personally am an investor in it. I always like to get those disclosures out so nobody misunderstands what we're talking about.

• 52:07Speaker 05

  And I'm an investor there too. So, yes. So, but, you know, Nick calls me after we first met and he says, there's this guy I want you to meet and just tell me what you think. He goes, we've invested. So Venrock had actually already invested in this case. So I meet Jason and I'm like, he had me on, hello, right?

• 52:26Barry Ritholtz?

  Super impressive, right?

• 52:27Speaker 05

  Incredibly impressive. So, the early days, it was Nick, Jason, and me in the boardroom. And, you know, I would say my role there was really twofold. One was just, Jason was a student of Vanguard and like, what did we get right? What did we not get right? How did we think about scaling? So I tried to bring that to, you know, to the discussions in the boardroom. And then, very importantly, over time, you know, Jason particularly asked me, like, can you, like, just talk to some of my senior team on a regular basis? And so I do. And, you know, that's the mentoring part. And I think that's a big part of what,

• 53:09Speaker 05

  in a sense, I'm there for is, you know, I've made a lot of mistakes. I've, you know, sort of lived a lot of different movies that they're gonna, they're gonna now watch and

• 53:19Barry Ritholtz?

  And live through.

• 53:20Speaker 05

  And live through. And, you know, where is it relevant and where is it not relevant? There are situations where new ideas get presented and then I will be part of the vetting process as well. So, you know, Vanilla, which is a software product, helped with estate planning. You know, we, basically, there's a Steve Lockson, who you know personally, incredibly brilliant planner around all this. And it's like, let's take his brain and codify it.

• 53:57Barry Ritholtz?

  Turn it into software.

• 53:58Speaker 05

  Turn it into software. And, you know, I got a chance to interact and we knew, we knew Steve a little bit from Vanguard and, and serving him, you know, through the investment side. We started an RIA from scratch. So I don't know if we'll ever be able to compete with you, but

• 54:17Barry Ritholtz?

  We're still under $10 billion. We're, which I have to explain to family members, is walking around cash. It's not real, real money.

• 54:25Speaker 05

  It's real money. It's, you guys have done a great job. But what if you had a blank sheet of paper and could create a firm from scratch? So we're going to do that. And we're in the process called ARCA. You may have seen some of the press releases on it. I got a chance to work with two co-founders, three, there are three co-founders of the firm Finney. And again, you know, Finney, you know, Finney, Finney's a little different because what Finney's trying to do is really help firms do a better job matching prospects and client and in turning prospects, the right prospects into the right clients. This is a huge problem in the RIA space.

• 55:06Barry Ritholtz?

  People don't understand how important fit is. And we've been fortunate to build that into our process because it's disruptive for someone to come in, they're the wrong fit, they transfer everything in. It's so much time and effort. It's such a lift. And then six months later, everybody realizes, oh, we've made a mistake. And then it's a divorce and it's disruptive on the way out.

• 55:30Speaker 05

  You know, we, we actually were really strict on client selection in my time at Vanguard. And so when I, when I met the, you know, the, two of the co-founders in particular, I talked to a lot, and they're describing this to me. I'm like, oh my God, I love this stuff. Like, this is exactly how, you know, it's one of the most important things you learn in terms of building a great business is, is that, is that fit. And they, they were doing, they were thinking about things from a technology standpoint that were way beyond me. I mean, they're, they're, you know, a bunch of AI engineers. They didn't exist 15 years ago, 10 years ago even. And so, you know, watching that, watching their thinking on that. But very importantly, one of the cool things, and again, I'm getting

• 56:15Speaker 05

  tactical here with Finney, but it's just interesting to me because they developed a way, you know, they're going to price this in a way that aligns outcomes much more structurally sound. So at Vanguard, one of the cool things we did was where we had active equity, for example, every active equity manager was on an incentive scheme where if they outperformed over a long period of time, we would actually pay more. And the expense ratio would go up. And we were happy with that. And if, by the way, if they didn't, they

• 56:51Barry Ritholtz?

  Goes the other way.

• 56:52Speaker 05

  They went the other way. We're the only firm who did that across every active equity portfolio. And we did that very early. You know, Finney's doing a similar concept, an analogous concept with like, you know, we're not going to be your traditional SaaS company where we charge these really big seat licenses and, you know, we're negotiating who's using what. We're going to do it all on success. Like, if, if you get the right clients, we're gonna, we'll earn more money. And if you don't, that's, that's on us. It's a really cool concept. And, and so, again, I got tactical there, but it, it makes a point that, you know, what you're really looking for, if, if they get it right, it changes the industry

• 57:34Speaker 05

  in a really positive way. Altrus gets it right. It changes the industry in a really positive way.

• 57:39Barry Ritholtz?

  So let's dive down into that a little deeper for, for each of those.

• 57:43Speaker 05

  Yeah.

• 57:44Barry Ritholtz?

  I had always been told, hey, custody is, you know, razor thin margins. There's nothing you can do there. And besides Schwab and Fidelity, the giants in that space, no one's going to take them on. You have to be a little, you know, crazy to, to say, I'm going to take on the two behemoths. But they've become, Altrus has become the third largest custodian for RIAs, at least if we're going by advisor served. I don't know what it looks like by, by dollar amount. What did you see when you first started talking to Jason Wank about what has always been such a challenging, low margin business?

• 58:27Speaker 05

  You know, Jason had this vision that, that the legacy players, you know, do a fine job, you know, at a level. But in a sense, these businesses had become, you know, I hate the term cash cow, but, you know, there, there's not a lot of innovation, not a lot of new technology being brought to bear.

• 58:46Barry Ritholtz?

  I want to say two years ago, and I hope I'm not getting this wrong, I think it was Schwab was generating 57% of their revenue just from the cash sweep that they're paying a few bips on, but earning for 3%, 4% on.

• 59:02Speaker 05

  Spread, it spreads everything there. That's exactly right. So, you know, he had this path, and he had been an advisor. And so he's like, what do I really want? And so the way, the way we thought about it was, yes, there's the, it's, there's custody and we can digitize it and we can make it much more efficient. We can make it much better, lower cost, frankly, for the advisor, so they can pass on value to the client.

• 59:31Speaker 05

  You can though, actually make it a platform that's more than just custody. So we introduced Hazel, which is this great tax planning capability, as you know, AI driven, and it's taken the

• 59:44Barry Ritholtz?

  Everybody in my firm loves it. And PS, Jason was more than an advisor, he's an engineer. So he brings sort of that coder mentality to how can we use technology to make this faster, better, cheaper?

• 59:57Speaker 05

  So the way I always envisioned the direction we get, we go was this is going to be the platform of the future for advisors. And we will make it so much easier for them to do what they need to do. And Jason's got that engineering mentality. He's got that drive. He's incredibly passionate. If you look at the, you know, you look at the Altrus flywheel, it looks a lot like the Vanguard flywheel did, you know, in terms of just this, if it works, the self reinforcing perpetual improvement, perpetual driver of good outcomes has been created.

• 1:00:40Barry Ritholtz?

  What's the old line? I think this was Jeff Bezos, your margin is my opportunity? That seems to be what's happening there. Tell us a little more about Vanilla. What, what are they doing? And where is the disruptive opportunity there?

• 1:00:55Speaker 05

  So with Vanilla, you know, if you think about, at the high net worth and ultra-high net worth, which is, you know, significant amount of assets in the industry, you know, we talk about asset allocation, we talk about cost, and you know, at Vanguard, we really talk about cost a lot. The single biggest opportunity for value add is in estate planning. You can save people millions of dollars where there's no other category that can do that. And Vanilla changes the experience dramatically for the advisor providing that estate planning, rather than whiteboards and stickies and flow diagrams, hand drawn.

• 1:01:38Speaker 05

  It just gives you this incredible automated output. So, and I got a chance to be kind of an early pilot, because Vanguard was actually an investor in Vanilla.

• 1:01:51Barry Ritholtz?

  Vanguard itself? Oh, really?

• 1:01:53Speaker 05

  Yep. And they, you know, were running pilots. So I raised my hand, said, you, the best conversation I've ever had with the advice team that does our family.

• 1:02:07Barry Ritholtz?

  Wow.

• 1:02:08Speaker 05

  By far. Because we got, I mean, it, you know, it built this whole balance sheet in one place, all the family, all the family trees, if you will, were all right there, all done, automate, in an automated fashion.

• 1:02:22Barry Ritholtz?

  And Vanilla is a product that is not necessarily the end investor, but the advisor in between?

• 1:02:29Speaker 05

  Yeah.

• 1:02:29Barry Ritholtz?

  It's a little complex for the average person who's just logged on on their own?

• 1:02:33Speaker 05

  Yeah.

• 1:02:33Barry Ritholtz?

  The whole estate planning process?

• 1:02:35Speaker 05

  It really is a business, it's really being sold to advisors. So you're seeing wealth management firms adopt it. So, you know, the Vanguard's of the world and, you know, other big firms you would know well, bringing it in and saying, this is going to be the platform where we do estate planning.

• 1:02:53Barry Ritholtz?

  So I'm hearing a very consistent theme, which is all of the disruptive fintech that you're involved with, Finney, Altrus, Vanilla, seems to be all marketed to the advisor is, which is so different from what you're doing on the board seats. Any other startups or other technologies you're looking at, either to the advisory community or anywhere else?

• 1:03:21Speaker 05

  You know, yeah. So I've been involved in a couple of others. You know, one, there's a company called Moment, which is some ex citadel guys who really are reinventing the way fixed income gets traded. And I'm not an investor there, but I, I like to think of myself as a friend of the firm. And Venroc is an investor there. And so, you know, I have those conversations. Again, the theme is not dissimilar in that you're making the world better, because they're, they're, they're doing things with fixed income trading that has, have been done on the equity side for years. You know, fractional trading, the

• 1:04:03Speaker 05

  bonds, they make it like that. And they're really having a pretty significant impact. There's one that, there's one that we're involved in, again, I'm not an investor in this one either, but I talked to him a lot around litigation. So that's a little bit different. It's my one non sort of investment oriented thing.

• 1:04:24Barry Ritholtz?

  What's the name of that firm?

• 1:04:26Speaker 05

  Silo.

• 1:04:27Barry Ritholtz?

  Okay.

• 1:04:27Speaker 05

  And again, what's really cool about them is it's a marriage of incredible legal talent with engineering mindset. So imagine the Jason Wank of litigation lawyers, like this, you know, people who write code, but have deep litigation experience.

• 1:04:47Barry Ritholtz?

  There have been a handful of funds over the past few years that literally are making investments based on litigation outcomes, class action outcomes. And they're truly non-correlated, because the outcomes have nothing to do with the market or the economy. It's a really interesting space.

• 1:05:06Speaker 05

  Yeah. And, and you know, this, this company will do things that will, this is going to disrupt this industry as much as anything we've talked about. So, you know, for me, you know, the, the fun part is all these entrepreneurs, you know, it's like you're, you're getting a chance to work with some of the brightest minds in the country. They're all super passionate about what they do. And, and they're incredibly talented. And you know, you're not going to get it all right. And you're, some of them are going to be more successful than others. But the, you know, if you can sort of help them along a little bit with lessons learned and whatnot, you know, it's incredibly gratifying.

• 1:05:49Barry Ritholtz?

  You give them the best chance for, for future success. So, so the future of advice going forward, you've mentioned some of the robo-advisors like Benham and Wealthfront. And in fact, the robo-advisor that Vanguard set up under your leadership, quickly scaled up to 100 billion plus and then kept going. Now the biggest, by far, the biggest robo in the world. But it doesn't sound like you think that the future of advice is just going to be automated or technology. What does the future of advice look like for both the

• 1:06:32Barry Ritholtz?

  average mom and pop investor who needs some help planning their retirement or paying for kids' college, or the higher net worth that's thinking about, what am I going to do with this extra capital in terms of philanthropy or generational wealth, straight up to, you know, the multifamily offices and, and big numbers?

• 1:06:52Speaker 05

  So look, I think there'll be, you know, I think there's going to be a spectrum. I do think there will be people who go the automated way, fully automated, you know, the, the original Wealthfront model, if you will. But increasingly, I'm pretty convinced that it's going to, the, the bulk of the people, investors, are going to go with advisors where there's a human touch. I think that human touch is incredibly important. And so all the technological advances that we're seeing, whether it's Vanilla's software planning, whether it's the platform that Altrus is developing, whether it's Finney's ability to help you, you know, grow your business more effectively and, and organically, those

• 1:07:36Speaker 05

  things free up the advisor to do the personal stuff. And so, you know, I don't know at Ritholtz, what your average number of clients per advisor is, but let's just say it's 100, which is in the industry, kind of a norm. I see no reason why somebody can't serve 300 more effectively than they serve the 100 today with the technology that's coming. And the reason I think it's important to have that person is, I think that the really thoughtful advisor can really prevent you from getting off the reservation. You know, the automated programs are great, but people can opt out of them pretty quickly.

• 1:08:19Barry Ritholtz?

  Right, right.

• 1:08:20Speaker 05

  And we do see that, you know, and, and again, you said, the last six months are always indicative. You know, one of the things that we didn't talk about, but it's incredibly troubling to me, is the over gamification of investing that's going on right now. And the amount of day trading, we're back to day trading.

• 1:08:36Barry Ritholtz?

  Sure. I started in the 90s when that was, you know, I, I remember the E-Trade commercials and the tow truck driver who owned an island, he just likes to help people who get flat tires. So he's still doing it. Like that was, and it's full circle between the prediction markets and then all the gambling apps. We're right back to where

• 1:09:00Speaker 05

  And, and you, you actually see it in trading volumes?

• 1:09:03Barry Ritholtz?

  End of day options, single day options?

• 1:09:07Speaker 05

  It's, you know, it's not all being done by algos and hedge funds. Like there's a retail element now that's incredible. And, you know, again, you take an S and P 100 stock that might have traded, you know, 10 million shares a day, now it's trading 50, 60, 70 million shares a day. And what, what, it becomes this self perpetuating thing. The more volatility there is, the more the day traders come in, the more they come in, the more volatility there is. And, and, you know, at the end of the day, you know, that only the house wins there. Like, the house will win.

• 1:09:43Barry Ritholtz?

  Same is true with the prediction markets. There's a tiny percentage of consistent winners and 90 something percent of people are making donations.

• 1:09:53Speaker 05

  That's right. So that's why I think the person remains incredibly important. So, you know, it was interesting, in a venture capital conference I was at, you know, somebody asked a question. They said, do you think that all the AI and all the, all the technology that's coming is going to replace humans or enable humans? And I think it's, I think there are places where you can say it's replacement.

• 1:10:14Barry Ritholtz?

  Could be both, sure.

• 1:10:15Speaker 05

  Yeah, could be both. I think here, the majority of it's going to be enable.

• 1:10:19Barry Ritholtz?

  So what, just to share a little bit of what we've been seeing, it's not that we're creating new information, we're finding ways to

• 1:10:32Barry Ritholtz?

  Take notes and, and keep running dialogue of, of everything that's going on with AI, but then access it and use it in a way that is just enormously helpful to, to clients. And very often, you know, if you're having a conversation with a client that's an hour, you're doing a year end review, or maybe it's a quarterly review or anything like that, lots of stuff goes by that you may not pick up in that moment. But if you have a tool, taking notes and reviewing it and summarizing it and remembering that two years ago, they said, "We'd really like to buy a vacation property now that the kids are out of the house, but we're not sure what we can afford."

• 1:11:15Barry Ritholtz?

  Hey, if you can access that and not forget it, if you have a permanent memory, not only can you successfully manage more clients, but you're going to do a much better job of it. And so, the fear of all this job loss, I mean, it's certainly not showing up in much of the data yet. You still have relatively low unemployment and relatively low unemployment for people under 25, which usually runs about double the traditional U3 unemployment. So, so I'm fascinated by this. Do you recall in, in the mid 2010s, the assumption was, "Oh, these robo-advisors, they're going

• 1:12:00Barry Ritholtz?

  to put all the humans out of business." Is this just an ongoing Luddite fear that every new technology leads to?

• 1:12:09Speaker 05

  I think so, because, look, there is disruption. I mean, there were, you know, and-

• 1:12:14Barry Ritholtz?

  And certain jobs are going to go away.

• 1:12:15Speaker 05

  Right. And when you're in the middle of that, like, it's overwhelming. But I do believe that the creation of new categories of jobs, you know, we can't even imagine is going to continue. I do think there are areas where the technology just allows you to do more, like you, you described. You know, it's interesting, we had, we had an interesting thought experiment. So, when the, the robo's started, our, I, our idea was to take the best of Wealthfront technologically, but to have a certified financial planner at the, on the, at the

• 1:12:55Speaker 05

  end of the telephone or video screen to interface with the client. And my chief of staff, who was a 20-something software engineer at the time, said, "Oh, like, no, like, who needs, who needs a person?" Like, and I said, "Well, how much?" You know, so I said, "So, we, we formed a little, we got a little focus group." This is completely unscientific. This is, again, sometimes how I, I like to do things. And so, we, we sat around and we said, "So, I give you $25,000, but you want a little bit of advice." They all wanted robo. Like, "I don't want to talk to somebody." I said, "It's $150,000," which for them at the time was probably equal to a, a year's pay.

• 1:13:36Speaker 05

  Four or five out of the six were like, "I, I gotta have a person." Like, you know, "Technology can be helpful, but I need to be able to talk to somebody for that amount of money." And it really stuck with me. Like, you know, there's, there's, there is, there is a comfort. And, and, you know, again, you've, you've done a lot with Morgan Housel over the years. The psychology of that and that need for human interaction, I, I think is very powerful.

• 1:14:02Barry Ritholtz?

  So, I always hated the idea, listen, I'm a middle-class kid from the suburbia. I didn't grow up with any money or any thoughts of an inheritance or anything like that. The idea of having a $10 million or even a $1 million minimum was, I was never comfortable with. So, we set up two digital platforms, one driven by Betterment, which is under a quarter million dollars, and there is a group of advisors that come along with that. So, if you're a 50 or 100, or $5,000, it doesn't matter, there's no minimum, if, if you're up to quarter million dollars, the whole platform is digital, everything from

• 1:14:44Barry Ritholtz?

  the onboard to the allocation, but there is a live human being there if you want to talk to somebody. And then, the platform that we built from a quarter million to a million was based on buying BlackRock's future advisor, which they figured out, "Oh, this isn't the future of ETFs. We don't need to own this." And so, we ended up purchasing that from them. Not only is that 250 to a million, but it comes with also with a specific advisor. And as much as people say, "I love the digital platform, I don't need to deal with anybody, I just want to log on to the website or app and, and deal with it," as soon as there's

• 1:15:27Barry Ritholtz?

  any volatility, they just want someone to talk them off the ledge and say, "Hey, it'll be fine. We go through a 10% drawdown, you know, two out of every three, I want to say it's three times every two years, something like that. So, this is normal and, you know, if you look at, here's how many drawdowns we've had over the past 20 years." They may not know that, they may not have access to that, but if a person says, "Hey, we can't guarantee you that the market's going to keep going up forever, but here's what the history looks like." It, it's just a huge comfort for people and, and they could stay out of their own way.

• 1:16:04Speaker 05

  Absolutely. So, you know, I think it's really powerful. And, and again, thematically, certainly, everything we're working on, you know, in, in a lot of our startup land is exactly, it's taking that, that concept.

• 1:16:17Barry Ritholtz?

  Using the technology to make it faster, better, cheaper, but making sure a person is in the loop for that comfort level.

• 1:16:24Speaker 05

  Faster, better, cheaper, way more personalized, way more personalized.

• 1:16:27Barry Ritholtz?

  So, we've covered so much stuff. Before I get to my favorite questions, is there anything we haven't covered yet?

• 1:16:35Speaker 05

  I think we're good.

• 1:16:36Barry Ritholtz?

  We, we, we tagged, touched a lot of stuff. So, so, let's jump to those questions and I've asked you these 10 years ago, but I want to circle back to them.

• 1:16:46Speaker 05

  See if I'm consistent.

• 1:16:47Barry Ritholtz?

  Right. Well, we'll see what's, or what, what's changed over the past decade. So, I'm going to assume your mentors are all fairly much the same. Tell us who, Jack Brennan, clearly one of those people, who, who were the mentors who, who shaped your career?

• 1:17:01Speaker 05

  So, Jack Brennan, certainly, you know, and I talked about that earlier, but, you know, lead by example and, and the power of we versus I. I had a rowing coach, post-college, and his big thing to me when I was thinking about leaving New York and going to Vanguard was, "Find a place that matches your values and you'll be happy." And I dedicated my last annual report at Vanguard, you know, Vanguard Funds to him, you know, a section of it to him, because that advice actually was what put me over the, the top in terms of, "I gotta go to Vanguard." You know, the, the other, there were so many other mentors.

• 1:17:43Speaker 05

  One I'll mention, though, we had a great board in, early in my career, and Charlie Ellis, who, you know, the, the great author of Winning the Loser's Game, Charlie was on our board. And Charlie was actually a real mentor to me, because when he was at Greenwich and he would come and present to us how we did competitively in the 401K market, and I was running that business. So, we developed a pretty good bond. Then when he came on the board, you know, he just was always there to sort of, you know, push and prod a little bit and help shape me. And, and again, the way he thought about investing just absolutely resonated, obviously, with what we were doing.

• 1:18:27Barry Ritholtz?

  He just wrote a new book, just dropped a few months ago. He's, he's still active in his 80s.

• 1:18:31Speaker 05

  It's incredible. It's incredible.

• 1:18:33Barry Ritholtz?

  Speaking of books, what are some of your favorites? What are you reading currently?

• 1:18:37Speaker 05

  So, right now, I'm reading Jim Collins's What to Make of a Life, which is very different for him. It's not a business-oriented book, as I mentioned to you in, in other times, Good to Great and Built to Last, Jim Collins classics, you know, they're the first business books I go to. But this is, what he does is, he takes lives of people we know in sort of pairs, and he just, like, what were the key events that made them do what they do? So, he uses like two football players from when I was growing up, Carl Eller and Alan

• 1:19:20Speaker 05

  Page, Minnesota Vikings. One of them went on to have a real drug problem and then become an incredible champion of rehabilitation and did so much for his community. The other one went on to be a Supreme Court Justice in Minnesota.

• 1:19:36Barry Ritholtz?

  Wow.

• 1:19:37Speaker 05

  And what were the key decisions? What allowed them to go from this great football career to a second act? So, anyway, I'm reading that. I'm, I'm partway through it. It's phenomenal.

• 1:19:48Speaker 05

  The, and I always have a fun book or two I'm reading too. So I'm still a big science fiction collection. So the strength of the many and the strength of the few. It's two parts. There's a third one coming. Imagine ancient Rome meets the Matrix. That's all I'm going to say.

• 1:20:05Barry Ritholtz?

  Wow.

• 1:20:05Speaker 05

  Only, only a weird brain like mine could find that fascinating.

• 1:20:09Barry Ritholtz?

  That's intriguing. I watched and, and read Project Hail Mary, written by the same author as Martian.

• 1:20:18Speaker 05

  Yep. Andy Weir.

• 1:20:20Barry Ritholtz?

  Really fascinating book. He's such a great writer.

• 1:20:22Speaker 05

  He's phenomenal. One of my favorites.

• 1:20:24Barry Ritholtz?

  Um, well, speaking of, of movies and/or videos or podcasts, what are you streaming, listening to, watching these days?

• 1:20:34Speaker 05

  You know, not, not a ton. The, the most recent podcast was the acquired podcast. They did a huge thing on Vanguard, mostly on Jack Bogle. It was great.

• 1:20:45Barry Ritholtz?

  Yeah.

• 1:20:46Speaker 05

  It was really, really worth doing. Ben Gilbert and his partner, they just did a fantastic job. You know, most of the other things, the streaming, I just re-watched. Netflix did this three-year series on the Tour de France. I'm fascinated by sports called Unchained, and it's really good. So that was sort of a fun one.

• 1:21:12Barry Ritholtz?

  Our final two questions. What sort of advice would you give to a recent college grad interested in a career in either financial advice, wealth management, or fintech startups?

• 1:21:27Speaker 05

  Well, so on the latter, there's never been a better time to start a company. You know, the, with technology being as ubiquitous as it is and cheap, frankly, you can, you can take an idea and you can build something pretty quickly without a ton of money. And then if it's a really cool idea, you know, you, there are people ready to help you.

• 1:21:49Barry Ritholtz?

  And write a check.

• 1:21:50Speaker 05

  And write a check. And, and so I'm encouraging people who have that entrepreneurial itch, this is a great time to scratch it. Like, don't wait. But, you know, think about what you're trying to do. Don't do it just because you, you want to quote unquote, get rich. Do it because you have an idea that really matters and something, I always apply this, it's a Jim Collins phrase, the hedgehog concept. What are you passionate about? What can you be great at? And I mean great. And then how does it drive your, the economic engine? And so you, you want to have a passion, you want to, something that you truly believe you can be world-class at, and it's got to economically, there's got to be an engine

• 1:22:34Speaker 05

  that, that it drives. And, and if you, you know, today, it's just a great time to be doing that. If you're going into the asset management investment world, I think the two places that are going to be the most interesting, you know, I continue to think the venture world's really interesting because this, you know, whatever anybody's politics are, whatever all this stuff.

• 1:22:58Barry Ritholtz?

  It's cutting edge. It's the latest and greatest.

• 1:23:01Speaker 05

  You know, there are so many cool things going on right now. And, you know, the chance to actually go explore that and invest in that is kind of fun. But I think wealth management, you know, I think the idea, you know, I, I think this advice thing has got a long way to run. And if I were, you know, a young grad, you know, rather than going into a traditional asset management, I, I would be thinking much more about individual wealth and, you know, how to start my own advisory firm, or how to be part of a Ritholtz wealth, or something like that.

• 1:23:38Barry Ritholtz?

  Our, our final question, what do you know about the world of investing today that might have been useful back in 1986 when you, when you first joined Vanguard?

• 1:23:48Speaker 05

  Well, so much. You know, the long-term really is the way to think about things. I, I think even though, you know, I joined a firm that was famous for it, I, I don't think my own brain was set around long-term. And the ability to sustain your beliefs and your discipline over the long run is a singular differentiator. And, you know, I've had the privilege of being inside of a lot of different firms, and it's, it's amazing how many people don't actually still get that. So I think that, and it took me a while before I got there, so I wish I'd had it right away.

• 1:24:30Speaker 05

  You know, second for me is really pay a lot of attention to things that nobody's talking about. Like, you know, and, and it, this is much harder. So as you know, when you started the big picture, I, I, I actually started every morning with reading the big picture because you did a really good job curating what was out there and getting rid of a lot of stuff.

• 1:24:57Barry Ritholtz?

  Right. That, there's a long history, which we'll, we'll discuss off, offline, but when Brennan said to me, hey, I've been a reader of your stuff, when I first met him at some, you know, large conference room of lunch 20 years ago, my, my head exploded.

• 1:25:17Speaker 05

  I might've been one of the people who pushed it that way. But, you know, it, to me, it was a really important thing. And, you know, I, I think like today, people aren't talking about leverage that much. And like, I worry about leverage. Like, you, when you look at what the hyperscalers are doing in terms of the bond market right now, and, you know, a, a couple of them are not, are not net cash flow positive because of all the infrastructure that they're building. The leverage in the system, you know, private credit had its moment, you know, a year ago or whatever, six months ago. And, you know, that was one you could see coming. I worry a lot about leverage. No one's talking about it.

• 1:25:59Speaker 05

  So it's, it like, I didn't really, you know, in the, in the, when I first started out, that way of thinking, that contrari- contrariness was not part of like how I had, you know, been trained or brought up. But again, this is where a Jack Bogle, a Jack Brennan, John Neff, the great value investor, they were really impactful.

• 1:26:22Barry Ritholtz?

  I, I was going through an old piece I was writing and never finished, and I found some notes, and I can't figure out whose line this is. It feels like I'm stealing it from somebody. Equity crises bruise, debt crises maim. And I've been unable to track that down, and it doesn't sound like something I would have written. But anytime I use something from someone, I'm usually very, very fastidious about making sure the quote is attributed correctly. But it's just reminds us of, you know, leverage kills. Look, look what's going on in Korea with their 3X and 5X funds.

• 1:27:04Barry Ritholtz?

  As those unwind, man, they've had a great run, and they've given a ton of it back because of the leverage. Bill, I could talk to you for two more hours. Thank you for being so generous with your time. This has been utterly fascinating. We have been speaking with Bill McNabb, former chairman and CEO of the Vanguard Group, board member at IBM and UnitedHealth, senior advisor to Venrock, as well as board member and advisor to so many startups. If you enjoy this conversation, well, check out any of the 654 we've done over the past 12 years.

• 1:27:43Barry Ritholtz?

  You can find those at Apple Podcasts, Spotify, YouTube, Bloomberg, wherever you get your favorite podcasts from. I would be remiss if I didn't thank the crack team that helps put these conversations together each week. My audio engineer is Alexis Noriega. Anna Luke is my producer. Sean Russo is my researcher. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.