Investing in Financial Security: Masters in Business with Salim Ramji

Barry speaks with Vanguard CEO Salim Ramji. They discuss his early career journey in law before transitioning to BlackRock as Head of Corporate Strategy and later taking over as the first "outsider" CEO of Vanguard. They also discuss Vanguard's recent acquisition of Altruist and what it means for the future of financial advice. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

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• 1:47Speaker 01

  This week on the podcast, yet another fascinating conversation. I sit down with Vanguard's C E O, Saleem Ramji. Previously, he was at BlackRock helping to oversee iShares and indexing. He's got a fascinating background and really one of the people in the wealth management industry who is so uniquely situated to see all of these different things that are going on. What a great perch to observe the future of wealth management. I thought this conversation was fascinating, and I think you will also, with no further

• 2:22Speaker 01

  ado, my conversation with Vanguard's Salim Ramji. Salim, welcome to Bloomberg.

• 2:38Speaker 03

  Well, thanks, Barry. It's great to be back. I think we did this about half a dozen years ago.

• 2:42Speaker 01

  Right in the middle of.

• 2:43Speaker 03

  In peak COVID.

• 2:44Speaker 01

  Yeah, we, it was, it was a frightening time.

• 2:46Speaker 03

  Yeah. It's nice to be in a studio.

• 2:48Speaker 01

  Yes, I want to talk about your career and what led you to Vanguard.

• 2:52Speaker 03

  Yeah.

• 2:53Speaker 01

  But I, I have to start by asking about your academic background. Bachelor's in economics and politics from the University of Toronto, and then a master's in law at Cambridge. And I'm assuming a master's in Cambridge is like a J D here, is that right?

• 3:11Speaker 03

  Kind of.

• 3:12Speaker 01

  Kind of. Was the original career plan becoming an attorney?

• 3:16Speaker 03

  Neither of my parents finished high school. My dad used to run a grocery store that I worked in as a kid. And, and from my parents' point of view, they just wanted me to go to college. And, and so I don't think there was any great kind of original plan, other than I thought, like, going to college would be a good thing. And I, I was drawn to the law and ultimately, my first job was at a law firm in London, in part because there were so many exciting and interesting things happening in the world of kind of law and business in the early nineties in Europe at the time.

• 3:58Speaker 03

  And so that, for me, was kind of a compelling piece, but I wasn't one of these kids who was like, you know, from the age of 10, they wanted to be a lawyer for the, you know, from, from that. It was more, it felt like a really interesting time at that point with like markets liberalizing and lots of new markets opening up all over the world.

• 4:20Speaker 01

  I'm curious how your upbringing affected how you look at money. You mentioned you worked in your dad's grocery store. Both your parents were immigrants working and living in British Columbia.

• 4:31Speaker 03

  Yeah.

• 4:32Speaker 01

  How did that affect how you have a relationship with money and work?

• 4:36Speaker 03

  It probably, you know, some of these things you don't really truly understand until years later. But we didn't always have a lot of financial security growing up. And I'm in a, at a company and that cares very deeply about people's financial security. And you can sometimes abstract kind of that away in terms of what it means, but at least for me, I know what having it is, and I know what the absence of it is. Obviously, having some financial security is far better. And, and I think it really drove home for me the real importance at a kind of very personal level as to what financial security means in somebody's life or somebody's family

• 5:20Speaker 03

  and the importance of it to so many other things in terms of like the general kind of happiness of the house, the levels of stress in the house, the, the freedom to be able to do things kind of once you've attained it. And so financial security isn't a, it's something that, that, that I know kind of deeply because I know its absence too. And, and so I think it makes it meaningful for me, even if you, you ask the 20-year-old version of me, I wouldn't have thought of it in that way.

• 5:51Speaker 01

  I think a lot of people don't realize the first checkbox is lack of financial stress is a huge weight off people's mind.

• 5:59Speaker 03

  Yeah.

• 6:00Speaker 01

  If you could solve for that, everything after that feels like gravy.

• 6:03Speaker 03

  Yeah, no, I absolutely agree.

• 6:06Speaker 01

  So, so you're, you're working in London in Clifford and Chance. You also spent some time in Hong Kong?

• 6:11Speaker 03

  I did.

• 6:12Speaker 01

  Was that doing legal work?

• 6:13Speaker 03

  It was doing legal work.

• 6:14Speaker 01

  And then how do you transition from that to McKinsey? What led to that?

• 6:18Speaker 03

  It was, you know, like, I, I enjoyed the business part of being a lawyer. Like, I'd work in financial markets, I'd work in M and A, and I was always interested in what happened after the deal closed, in the business aspects. And, and McKinsey, for me, kind of offered the chance to still be in a professional services firm, which I liked, still serve clients, which I liked, but also to get a little bit deeper on kind of the business of things. And, and I had a kind of a wonderful career there for a dozen or so years, really learning about financial institutions and working and advising a whole range of financial institutions in, in New York and, and beyond that.

• 7:03Speaker 01

  So I'm fascinated because attorneys and consultants advise people running businesses, and then you made the transition to actually running a business at BlackRock.

• 7:13Speaker 03

  Yeah.

• 7:14Speaker 01

  What is, and when you were at McKinsey, you were running their asset and wealth management practice. So it wasn't a radical jump to go to BlackRock, but how different is it offering advice versus actually, you know, where the rubber meets the road, actually running a shop?

• 7:30Speaker 03

  It's really, it's really different. It's a, and I'd worked kind of with them as a client for a number of years before joining them. And it's a very different aspect when you're owning the outcomes, when you're having to lead broader groups of people, and when you're, you're having to kind of sweat every single detail, every single moment of every single day. And it was a great learning experience for me, because I joined them, you know, my early forties, and, and it's a chance to really learn a whole new set of skills, even though you know the industry and you think you know a thing or two about kind of the firm, you

• 8:14Speaker 03

  really don't until you're kind of deep into it. And for me, it was a great source of, you know, renewal, revitalization, a whole series of things that, that even to this day, I'm very grateful for.

• 8:27Speaker 01

  And I think if I, if my research is correct, you started in 2014 at BlackRock as head of corporate strategy?

• 8:34Speaker 03

  Yeah.

• 8:35Speaker 01

  Which is probably the most advice-oriented.

• 8:39Speaker 03

  Yes.

• 8:40Speaker 01

  Position within BlackRock. You're advising the board, you're advising management, hey, this is our strategic outlook, here's how we should proceed. From there, you end up running U S Wealth Advisory and eventually taking over iShares and Index Investing in 2019, which I want to say that was about $3 trillion, more or less. I don't know if it started there or finished there.

• 9:03Speaker 03

  About that, yeah.

• 9:04Speaker 01

  That's some real money. Now you're actually really running a, a business as opposed to offering advice at, at BlackRock. Tell us what it was like taking over such a massive part of the firm.

• 9:20Speaker 03

  You're talking about at?

• 9:21Speaker 01

  iShares and Index Investing.

• 9:23Speaker 03

  You know, it was, all of it was a bit of a, a journey. I probably spent about a year in corporate strategy, and that was really. You know, I got to learn the culture of the firm. I got to learn the people at the firm. I can't say I had tremendous impact in that year.

• 9:39Speaker 01

  Hmm.

• 9:40Speaker 03

  But it really led to the, the business of serving kind of a whole range of financial advisors all across the United States. And that for me was fascinating because I got to spend time with financial advisors in every major city, several not so major cities all across the US and just understand kind of how they were looking to grow their practices, grow their businesses. Many of them were, were effectively mid-sized business owners. And the chance to really understand what their needs were, how they served their clients was, was really meaningful. And, you know, for iShares, it was just really expanding

• 10:23Speaker 03

  that on a, on a much more global scale, given the global breadth of that firm.

• 10:28Speaker 01

  So iShares has become legendary. It's probably the single most successful M and A action taken by any asset manager and has just grown into one of the most important parts of the world of advisory. When, when you assume leadership role at a division like that, that's so important and has been running on all cylinders for so long, is there any reluctance to interfere with what's working? On the one hand, you can't just rely on its momentum because eventually that peters out. How do you figure out, hey, we

• 11:11Speaker 01

  want to step on the accelerator without, you know, killing the goose to mix metaphors that laid the golden egg?

• 11:17Speaker 03

  Well, you know, the thing about any markets business is that the momentum sometimes interrupts you. And so you don't have a great choice in terms of how things evolve and the like. And, you know, when we last spoke six years ago, kind of right in the throes of COVID and the pandemic, that a few months before were also big dislocations that were happening in the bond market. And, and so one of the things that I learned was just about how to maintain the resiliency of investments that millions of people rely on, particularly in moments of stress. And, and some of that kind of translates, you know, through to Vanguard

• 12:01Speaker 03

  today, because even at moments that look kind of like they're not going to have kind of big disruptions, that doesn't mean that they might not kind of a few months from now or a few years from now. And, and the thing about investments and particularly things like index investments or ETFs, people naturally expect them to work kind of not just some of the time, but all of the time. And that's an inherent part kind of in the operation of it. But there's just a, a whole range of underlying pieces, whether it's in how our portfolio managers manage the assets, whether it's in, in how kind of the

• 12:40Speaker 03

  system of broker dealers and exchange providers and index providers kind of help maintain an orderly system. But one of the things that it really struck home to me, you know, back in 2019 and especially in 2020, was you can't take any of that for granted. And, and that requires work every single moment of every single day to make sure all the investments work as they ought to.

• 13:04Speaker 01

  It's kind of funny because we had been warned, hey, just wait for the next dislocation. Indexing is going to fail. ETF is going to fail. And it turned out, especially down 34% in about six weeks in the first quarter of 2020, indexing and ETFs both held up great.

• 13:23Speaker 03

  Yeah.

• 13:24Speaker 01

  What, what do you attribute that to?

• 13:25Speaker 03

  Well, one of the books I've been reading was a guest you just had on the show, Robin's book about, you know, fabulous debt and the, and the bond markets. And, and I think with each of the dislocations, and let me go back to the dislocation in 2020, I thought the most interesting set of things that happened back then was what happened in the bond market. The bond market was dislocated. The ETF market was not. And, and what really catalyzed kind of that dislocation was a whole series of movements towards ETFs, towards electronic kind of venues, towards more exchange traded versus over the counter pieces. And the bond

• 14:07Speaker 03

  market even today, six years later, is still in need of modernization. But that was a real catalyst to help the bond market modernize. If you go back even earlier to the financial crisis, markets dislocated, but more and more investors moved into index investing and particularly ETF investing. And we saw that kind of in, in Vanguard's flows at the time. And each dislocation kind of results in learnings about the market structure. And, and at least in more recent history, it's made market structure better because you learn a few things, consumers and investors learn a few things, and it's how do you make

• 14:51Speaker 03

  sure that the system remains resilient through each one of these. But I think ETFs, whether it's bond ETFs or equity ETFs, and even if I look back over the past 15 years, have kind of weathered most or almost everything that's been thrown at them.

• 15:06Speaker 01

  I have so many questions for you about running Vanguard and the future

• 15:10Speaker 03

  Yeah.

• 15:11Speaker 01

  of that company. But last question before we get to that.

• 15:15Speaker 03

  Right.

• 15:16Speaker 01

  You worked very closely with Larry Fink.

• 15:17Speaker 03

  I did.

• 15:18Speaker 01

  For, for nearly a dozen years.

• 15:20Speaker 03

  Yeah.

• 15:21Speaker 01

  How did his leadership affect how you think about running a company? What, what did you take from him?

• 15:27Speaker 03

  Well, you know, founders are different, right? Founders, and, and you'll know this too, kind of given your role at, at Ritholtz. But, but founders are different than CEOs. And I think the things I really learned from that whole experience was, was really just about the need to always be able to reinvent and look around corners and anticipate kind of a series of things. And, and I think learning from a founder of a company that's, that's built the company up at scale was a really great way in my kind of broad business experience to learn something new and learn it from someone who started a firm.

• 16:09Speaker 01

  Really, really interesting. Coming up, we continue our conversation with Salem Ramji, CEO of Vanguard, discussing what it takes to run one of the largest asset managers in the world. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

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• 18:54Speaker 01

  I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest today is Salim Ramji. He is CEO of the Vanguard Group, helping to oversee running about $12.5 trillion, is that about right?

• 19:12Speaker 03

  Right.

• 19:13Speaker 01

  In client assets. By the time this airs, it'll be 13 and change. So I have been fortunate enough to have interviewed every Vanguard CEO back to Jack Bogle. And now that you're here, I'm actually interviewing you as CEO. You're the first outsider to run Vanguard, which is kind of fascinating. And you never worked directly with Jack Bogle. So, so the first question I, I have to ask about operations at Vanguard is, how do you win the trust of the crew as an outsider?

• 19:48Speaker 03

  Yeah, it's a great question. And it's a, you know, about three, just under three years ago.

• 19:56Speaker 03

  Uh, probably like, I guess it was May 2024, uh, and the board had appointed me, uh, but I was now kind of meeting the crew for the first time. And, and you know, the thing about Vanguard and, and I'd always, I'd always kind of seen this from the outside about the culture and the mission orientation. Vanguard's always had that in its reputation. It's hard to explain, Barry, but from the inside, um, just how real that is. And, uh, you know, whether I go back to May 2024 and just really kind of seeing it and feeling it, you know, I almost felt like the, um, you know, there's that David Foster Wallace, uh, uh, speech that he gave at Kenyon College about this is water, right?

• 20:41Speaker 03

  And the big fish goes up to two small fishes and kind of asks them, how's the water? And one of the fishes, after one of the small fishes asks, you know, what the hell is water?

• 20:50Speaker 01

  Right.

• 20:51Speaker 03

  And, and for us, our culture was so real and so unusual. It's quite unlike any other company I've worked at or even advised earlier in my career. Uh, and I think the extraordinary thing about it is that it's been several years now since Bogle passed. Uh, uh, I'm the fifth CEO since him. The company's a lot bigger, uh, than it was 10 years ago or 25 years ago, but the culture is very real. And so I spent a lot of time in my first year, meeting crew members at our different sites across the United States and outside the United States, uh, understanding kind of what is it about the culture that made it, um, so pervasive and so real, uh, even at our scale?

• 21:35Speaker 03

  And giving them an opportunity to ask me a bunch of questions, which were really, do I believe in the mission, in the culture and in the values of the company? Uh, I probably met more people in my first six or nine months at Vanguard than I've met in my entire life, uh, kind of beforehand, but a lot of it was just around, uh, uh, uh, me coming to appreciate what went into building that. Um, I think for the crew to understand what made me excited and what made me tech and, and starting to connect both of those things in terms of, you know, how do we preserve, maintain the mission, the culture while being able to kind of, uh, develop and do, uh, a whole new set of things strategically.

• 22:19Speaker 01

  I, I think a lot of people either get Vanguard or don't. I'm curious, once you were on the inside.

• 22:26Speaker 03

  Yeah.

• 22:27Speaker 01

  Did anything surprise you as a former outsider? Like what, what is being done at Vanguard, be it culturally or just as an operational shop? What, what kind of surprised you from the inside?

• 22:41Speaker 03

  I would say, uh, beyond the sense that the culture was kind of real, which I, I wasn't sure, right? Um, uh, and, uh, I, I would say it's two things. You know, one of them was when I asked people about the culture, uh, it wasn't written down anywhere. Uh, and you know, last year was our 50th anniversary. And so we really took the opportunity, uh, we engaged about 4,000 crew members in the process. We went back to all the old Bogle memos and, and kind of books and the like, to really distill down, not just in words, what our cultural, uh, tenants or pillars ought to be, but also the behaviors that underpin it. And so it was this unwritten language and this unwritten code.

• 23:26Speaker 03

  And, and, um, for people, uh, who were joining us out of college or people who were, you know, might've joined us five years ago or more recently, it's kind of helping understand what the Vanguard culture was about. So it's surprising to me that it wasn't, it was this unwritten piece. Uh, and, and really it was very enriching for me and hopefully enriching for, for, for all of the crew to really be able to put it down and be able to kind of, uh, gain a sense of, uh, some consensus and some inspiration kind of, uh, out of it. I'd say the second thing is more strategic rather than cultural, was that we had so

• 24:07Speaker 03

  many opportunities, uh, to, if you will, extend the Vanguard effect, uh, even in existing areas that we were in. So I sat down, I remember, uh, it was July 2024 with, uh, Sarah Deveraux, who's the CEO of our fixed income team.

• 24:23Speaker 01

  Mm-hmm.

• 24:24Speaker 03

  And she took me through our fixed income performance, index and active. Um, our fixed income performance is extraordinary. Uh, I honestly had no idea. I, I knew of Vanguard from prior lives as an index fixed income manager. I didn't know how good we were at active fixed income. And I certainly didn't know that we started active fixed income in 1981. And so we'd been in the business for a long time. And, and so one of the very early things I was able to do was, you know, put a little bit more marketing resources, put a little bit more client time against fixed income, uh, to be able to help clients understand the value that they could get, uh, from low

• 25:06Speaker 03

  cost active fixed income, just as they could from low cost, uh, index fixed income. Um, but there were some of these things that I thought were just really, um, near-term opportunities to, to help people understand that even by changing things a little bit, we could really extend the Vanguard effect. We'd give clients a better deal. We could, um, help them kind of look at their total portfolios, uh, in a much more cost-effective and a much, um, higher quality way.

• 25:34Speaker 01

  So, so let's talk a little bit about the Vanguard effect. Uh, one of the first things you do is cut fees on 53 funds, creating about a quarter billion dollars in annual savings for your investors. Am I reading this possibly right? The average expense ratio, at least on a market cap weighted basis, is point oh six percent? Is that possibly right?

• 25:58Speaker 03

  That's right.

• 25:59Speaker 01

  That's astounding on almost 13 trillion dollars. Tell us what motivated you to lean even harder into, um, low cost?

• 26:08Speaker 03

  Well, you'd say some of it is honestly, Barry, just a function of our business model. We're owned by our clients. Uh, and so the way, uh, one of the ways in which our clients benefit from the scale, uh, that, that Vanguard's able to generate is they get lower fees. Right? So there was something very unoriginal in what I did because, uh, we've cut fees more than 2,000 times, uh, uh, before on those, uh, before we made the fee cuts on those, you know, 50 plus funds, uh, a couple of years ago. And, uh, and long may that tradition continue, uh, because it's an inherent part of being a Vanguard investor, that they get to benefit from the scale investors that we generate.

• 26:50Speaker 03

  In most companies, as they gain scale, um, it's the shareholders that benefit, uh, not the investors. In our case, the shareholders and the investors are one and the same, which is part of the, I think the original genius of the model Bogle put into place. Um, and so that was just a natural progression, kind of, uh, uh, of things. At the same time, we were also able to make a series of reinvestments back into our technology, back into, you know, areas like fixed income, uh, and being able to launch new offerings like our cash offerings. Uh, and so many of these investments, even if you just take the example of technology, that's been a multi-year, multi-billion dollar investment.

• 27:33Speaker 03

  It started before I arrived, uh, we continued it. And it was really to take the, uh, uh, move us off of a myriad of legacy mainframe kind of platforms onto a much more unified cloud native platform, which enables us to do a whole range of things to benefit clients and the client experience. And so we're always trying to balance both of these things, which is how do you maintain low cost? Because that's part of the proposition of why a Vanguard investor is a Vanguard investor. And at the same time, how do you also reinvest back in the business to be able to find new ways, either to enhance the client experience or, um, help people realize the Vanguard

• 28:16Speaker 03

  effect in newer areas, whether it's fixed income, cash, or even areas like advice?

• 28:21Speaker 01

  So you've been very aggressive about addressing things like customer service and technology. There were some problems that had been bubbling around before you arrived.

• 28:33Speaker 03

  Yep.

• 28:34Speaker 01

  Some customer service outages and some tech failures. And then there was the, again, all of this predates you. Uh, you settled the, the regulatory situation on target date funds and capital gains. And again, this is all in effect before you arrived. Clearly you've made customer service a priority.

• 28:53Speaker 03

  Yeah.

• 28:54Speaker 01

  What's the response been like? How are you going to continue to put things like this into effect?

• 28:59Speaker 03

  The response so far has been good, but we're not done yet. Uh, I think the technology underpinnings, which began before I started, uh, but we, we just completed the, the, uh, self-directed ones, uh, just a few weeks ago. Uh, I think that to my mind gives us an incredibly resilient and incredibly modern, uh, underlying technology stack, which solves some of the issues of the past, but also gives us a lot of opportunities to innovate in the future, including through AI, uh, but also in terms of the web experience, the mobile experience and, and a whole range of other things. I think the other piece that we were able to do was also reinvest back into client service.

• 29:41Speaker 01

  Mm-hmm.

• 29:42Speaker 03

  Um, so even beyond web and mobile, which accounts for the vast majority of our client service interactions, um, people missed things like their flagship advisor. Uh, and that's been something that's been part of Vanguard since the late 90s. Uh, we just relaunched it on October the 15th. So this is a couple of weeks old. But, but the client feedback so far has been tremendously positive. Because now flagship clients can get access to their own dedicated advisor. They can get better cash rates and a whole host of, of, of other things. And we've also been reinvesting back, even for our non-flagship clients, into people.

• 30:23Speaker 03

  And having well-trained licensed professionals being able to serve Vanguard clients. And so, you know, the pendulum swings from time to time between efficiency and experience. We've really made it a big and important part to invest back into client experience. And, and our clients have responded kind of very positively. There's still a host of things that we're coming out with next year and the year after. And so the thing about client experience is you're never done. But, but we're certainly committed to having a really easy, really intelligible client experience and, and, and something that is a reason why clients come to us for, in

• 31:05Speaker 03

  addition to all the funds and all the other benefits that they get from being a Vanguard investor.

• 31:10Speaker 01

  You mentioned advice. You took direct oversight of Workplace and Advisor Services, which is about $3 trillion. That is a key part of what Vanguard offers, but it never was the direct report to CEOs back in the day. Why did you think it was so important that you wanted to be that involved in, in advisor services?

• 31:36Speaker 03

  Yeah, it's a, um, look, some of it was just, we had a natural kind of retirement of one executive. Both of the executives who worked for that person are superb. And the other reason, if you think about things like advisor services, Workplace was pretty intuitive because Workplace, uh, you know, is the place that most investors invest with us for the first time.

• 32:01Speaker 01

  Meaning their 401ks.

• 32:02Speaker 03

  Their 401ks. And, and will be the Workplace provider for many Fortune 500 companies, many private companies, many professional services companies. And so having that direct connection made a lot of sense, both because we're dealing with a lot of companies and, and it has a central importance to Vanguard's mission. The financial advisors business, so this is the business that serves advisors that don't work at Vanguard, but use Vanguard funds. I naturally have a certain place in my heart for, for that segment, not just because I'm talking to you, Barry, but, you know, in my prior career, as you talked about. And, and what has happened to Vanguard over the past, I'd say it's been, it's been going

• 32:46Speaker 03

  for the past 10 or 15 years. It's probably started by Bill McNabb and really was a catalyst for this like 15 years ago, is that really paying a great deal of focus on fee-based financial advisors. And what we found is that if you have a fiduciary financial advisor, whose only interest is the client's interest, that, one, they're a really good partner for Vanguard, and two, the Vanguard funds do just fine as a piece of their overall portfolio, because then they're really focused on all the empirical evidence that Bogle and many others have been talking about for years in terms of high-quality, low-cost investments for the long term.

• 33:26Speaker 03

  And so that's become a, a much more important segment for us over the past 10 years, over the past 15 years. And, and so that was another kind of piece to it. And it also ties into, and I'm sure you'll get to it at some point, kind of the logic behind the Altrist acquisition.

• 33:45Speaker 01

  We're definitely going to talk about that. But before we do, I know you think of yourself as a Bogle head.

• 33:52Speaker 03

  I do.

• 33:53Speaker 01

  And I can hold two conflicting ideas in my mind at the same time. I sometimes find the Bogle folks don't grasp this. Vanguard put out a white paper years ago called Advisors Alpha.

• 34:06Speaker 03

  Yes.

• 34:07Speaker 01

  Talked about how, hey, here's what you get for your fee, and we're estimating this if they keep you from jumping off the ledge at 200, 250 basis points a year. The Bogle heads are not fans of this. I've always said, hey, if you can do it yourself and you're disciplined and you enjoy it, go do it yourself. But if this isn't for you and you want to pay someone to do it for you, get a fiduciary and run it that way. What is, beyond that, what is the best argument for someone hiring an advisor as opposed to just being self-directed?

• 34:44Speaker 03

  It's a, look, and Vanguard clients tend to skew self-directed. But we also have, we've also seen over the years, that is, that as our clients became more affluent, as our clients became older, as our clients' needs changed and became more complicated, they sought a financial advisor. And you're right, this Advisors Alpha, kind of both white paper and research, which has been going on for 25 years, so it's not a new thing that we started, it's something we update every single year, really points that for certain clients that fit that profile, having an advisor, provided they're a fee-based advisor in their fiduciary, which is a big provided, can be really helpful to clients.

• 35:28Speaker 03

  And, and in many cases, it's beyond kind of even just the core investments, right? If I, if I give you an example, this is anecdotal, so it's not in the Advisors Alpha research, like, you know, about 11 years ago, my father passed away. My mother didn't really have much to do with their investments, and she wanted to put all of their investments into cash. Her fee-based advisor really talked her out of it, explained to her that there is a better way to do it, and served her needs well. Now, I'm probably the worst nightmare in the sense of like, if you've got a client and their son is me, in terms of giving this advisor a hard time about fees and active

• 36:12Speaker 03

  funds and the like. But nonetheless, what he really did is that he helped her stop making what could have been a very costly mistake. And, and, and there's a lot of advisors who are, in a sense, the unsung heroes, because they're helping clients avoid really costly mistakes. It may be selling when the markets are, are kind of hitting a low point, buying when markets are hitting a high point, rather than staying the course and kind of taking a long-term view. It may be keeping clients away from the more speculative excesses that we see in certain aspects of the market. And, and it's very hard to quantify those things. But, but what I can tell you from all of our Advisor Alpha research and even my own

• 36:57Speaker 03

  personal experience, that these things really matter and they can make a huge difference. And, and so there's a really important role for a fee-based advisor to help individual advisors throughout the country. If anything, my biggest worry, Barry, today, 25 years after, is that too few people have access to financial advice. Only one in five Americans today has access to a fee-based advisor.

• 37:25Speaker 01

  It's that low, that's amazing.

• 37:26Speaker 03

  Yeah. And if you look out over the next 10 years, and we did this research, and it was part of the catalyst for Altrist, but if it's one in five today, that number gets worse over the next 10 years, because more advisors are retiring. People are getting wealthier, which is a good thing, if you're one of the wealthier people. But what it does is that it takes, makes that ratio worse rather than better. And so from our vantage point, if, if a good fee-based advisor is helpful, and we know that from the research, our own surveys with clients tell us that they want access to more forms of advice. Many of them want it kind of with a human in the loop.

• 38:09Speaker 03

  Then what can we do to really change that math? Just as I think Vanguard has done over the past 50 years, it's helped more people become investors. How do we help more people get access to good, sound, fee-based advice through whatever means we can, particularly using technology?

• 38:27Speaker 01

  Huh, really interesting. Coming up, we continue our conversation with Salim Ramji, CEO of Vanguard, discussing the future of advice. I'm Barry Ritholtz, you're listening to Masters in Business on Bloomberg Radio.

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• 41:43Speaker 01

  I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Salim Ramji. He is CEO of Vanguard and has driven some significant changes for the better at the firm. When I was doing my prep for this, we had spoken previously when you were at BlackRock and I had interviewed Bill McNabb and all of his prior predecessors, but I came across four themes. Just in all the public statements you made and all the things you've written about, it showed up. And I want to work my way through these four and then talk a little bit about the future.

• 42:24Speaker 01

  The first was simply cost and simplicity as a quality argument rather than as a race to zero. Lower cost drives up quality, which goes against the orthodoxy today of complexity, which for decades has masked higher fees.

• 42:44Speaker 03

  Yeah.

• 42:45Speaker 01

  Pretty fair statement.

• 42:47Speaker 03

  That's a fair characterization. And look, I was just echoing Bogle, who made all of these similar statements in the 80s and in the 90s and the like, which is that the financial services system tends to trend towards complexity.

• 43:04Speaker 01

  Mm-hmm.

• 43:05Speaker 03

  The reason, and again, this is one of Bogle's insights, almost the reverse of Occam's razor, which is that the simpler answer may be better, but the more complicated answer can justify higher fees. And it's bringing it all back to first principles as to what's the minimum that the client kind of needs to be able to achieve their outcome so that you can keep costs low and keep the efficiency levels high around that. And as you keep looking back to the facts and the evidence, whether it's from the 80s

• 43:41Speaker 03

  or 90s or 2000s, or even in the past five years, simplicity tends to outperform complexity all the time. And so it's how do you maintain that core principle? Not just because Bogle said it or because it's part of Vanguard's ethos, but in the vast majority of cases, it's empirically true and it will help the client over the long term.

• 44:07Speaker 01

  I love the Morningstar report years ago that sort of undercut the STAR model that said, hey, if you don't know anything, just pick the lowest fee.

• 44:16Speaker 03

  Yeah.

• 44:17Speaker 01

  And the data very much supports that.

• 44:19Speaker 03

  Yeah. And you know Vanguard's got active funds and it's got index funds and we have since 1975. And sometimes, now, people will often think of us about index funds because we invented the index fund. But the debate between active and index, to my mind, and in Morningstar's mind, is it's not so much about a style of management, it's actually just about the fee. Right? So low-cost active funds tend to outperform high-cost active funds. And it was, you know, Bogle's insight that again, he sort of put it as in investing, you get what you don't pay for. And that's true in active, it's true in index, but fundamentally, this is a debate about price.

• 45:00Speaker 03

  It's not a debate about one style or the other. And I think that really just goes back to the simplicity argument and the cost argument.

• 45:09Speaker 01

  Let's talk about another fairly simple argument, the cash flow test. We don't like things that don't produce cash flow, be they crypto, meme stocks, or prediction markets.

• 45:22Speaker 03

  Or even for that matter, gold, which has got a 3,000-year track record, right? Around it, but we think an investment is something that kind of generates cash flow or has the prospect to generate cash flow. And that's true in equities, it's true in bonds, it's true in public markets, it's true in private markets, but it's not true in any of the aspects that you talked about. And even if you get kind of beyond the piece of gold and commodities that have long track records but are nonetheless not investments in our orthodoxy, many of the other things that you listed aren't even like, I mean, they're speculative and they're gambling,

• 46:06Speaker 03

  masquerading as investments. And I think they can be quite corrosive to the overall trust and long-term nature that's been built over the past 50 years of great investments and a great investment culture here in the United States.

• 46:24Speaker 01

  Let's talk a little bit about private markets where, again, I'm paraphrasing, some exposure could make sense for very high net worth investors, but it must be good quality, low fee, and intelligible or defensive.

• 46:41Speaker 03

  Yeah, transparent. Yeah. It's a, and for this one, again, if you take a step back, we've got a term within Vanguard, within our CIO office that Greg Davis leads, which is, does it load? And so anytime we look at a new product, it could be an index product, it could be an active product, fixed income equities, public-private, we look at it relative to the efficient frontier of a index 60/40, 70/30, 80/20 portfolio. And does it have the possibility of generating something that's better than the efficient frontier of what that can do? The vast majority of products fail that test.

• 47:21Speaker 01

  Vast majority fail that test.

• 47:24Speaker 03

  Right.

• 47:25Speaker 01

  Wow.

• 47:26Speaker 03

  And because a 60/40, 70/30 index portfolio, 80/20, if you can pick the different allocations, actually does quite well over long periods of time for all the reasons that you know and that Bogle's written books about and we continue to publish research about. But there are certain circumstances where some private markets load in Vanguard's parlance. And there's a long list of caveats that then comes with that piece. At the top of the list, it wouldn't surprise you, is cost and transparency. And if you think about what Vanguard has been doing, actually back to our founding, right? Because our first Vanguard funds were Wellington funds.

• 48:06Speaker 03

  And we have a group of institutional active equity sub-advisors that we've worked with for 50-plus years. But we try and seek high-quality managers and we try and buy at institutional prices. And so it's a way of extending the Vanguard effect into active equities. Private markets is a branch of that same thinking, which is can we negotiate institutional fees? Because the fees in private markets, particularly for retail investors, are far too high. Can we pass that on to our individual investors or through their advisors?

• 48:49Speaker 03

  And can we make the overall fee structures more transparent? And so that was kind of the logic behind, whether it was the fund that we launched about six years ago with Harbor Vest, whether it's some of the offerings we're researching and exploring with other firms, like Blackstone, for example. But it's really with that lens of can we help bring the Vanguard effect to privates just as we have to public markets.

• 49:15Speaker 01

  Do you think at some point over the next decade or so, privates will be a widespread option for people's 401Ks?

• 49:26Speaker 03

  I think it'll be an option in people's 401Ks. Again, I can give you a long list of caveats, regulatory and otherwise. Whether it's widespread or not really depends. And I think some of it depends on that efficient frontier kind of that I talked about. For many clients, an index target date fund suits them just fine, right? Simplicity matters. And for many people, particularly in retirement plans, simplicity gives them a sense of safety, even a safe harbor, kind of from various things. I don't think that's going to change. But I do think that there are segments of 401K plans that do want access to some of

• 50:10Speaker 03

  the long-term return profile for some of their participants. And I think we're, provided it meets all of our conditions around, does it load? I think we're open-minded to being able to explore that. But I don't think it's going to be widespread in the way that an index target date is widespread. I think it can generate more superior outcomes to the active target date market than the active target date market provides today through public market investments. But I think that the index target dates will still be the leading kind of solution for the industry.

• 50:48Speaker 01

  Let's talk about acquisitions. You mentioned Altrus.

• 50:52Speaker 03

  Yeah.

• 50:53Speaker 01

  And full disclosure, I'm an investor in Altrus. I believe you also.

• 50:56Speaker 03

  We were in early. Not me personally, but Vanguard was an investor in Altrus in the Series A round.

• 51:01Speaker 01

  And your predecessor, Bill McNabb, was one of their early advisors and investors and a prior guest on the show. This is a giant, relatively giant acquisition for Vanguard that's not known for doing big, multi-billion dollar buys. There been a series of tactical or strategic little?

• 51:24Speaker 03

  Yeah, like one other one.

• 51:25Speaker 01

  But nothing like this. So tell us what you think the Altrus purchase does for Vanguard the company and for the investor base.

• 51:34Speaker 03

  Yeah, well, I'll give you kind of some of our thinking, Barry. I may not be able to answer all your questions because the transaction has yet to close.

• 51:41Speaker 01

  Sometime this year?

• 51:44Speaker 03

  Yeah, I hope later this year. And so I can give you the part two, either myself or Jason, we could both give you the part two at a future date. But let me give you some of the, let me answer the first part of your question, which is really about the why. And the why really came down to a couple of parts, some of which we've talked about before. At the broadest level, we saw a scarcity of, we saw a real problem of access to advice. It's back to this one in five Americans have access to a fee-based financial advisors today. And how do we help change that? So two out of five or three out of five, like most Americans can have access to some form of guidance or advice.

• 52:27Speaker 03

  Altrus for us played a really important role or plays a really important role in that for a couple of reasons. One, they're already serving several thousand independent financial advisors today and we really believed in their growth trajectory tomorrow, kind of having had a ringside seat since shortly after their founding. We could really see the client loyalty they're building with advisors, the ways in which they're equipping advisors to help do better things. And the second piece, which relates to the first, is just their technology. And their technology is really built for advisors, helps take out some of the day-to-day,

• 53:08Speaker 03

  but also helps augment things that advisors can do for their clients. And so we think it can make a real dent in the access problem. Because if they can help advisors serve twice as many clients, that really starts to scale. And if you can get more people have access to more fee-based advisors by using better technologies like Altrus or Hazel, we think that's a really important component to being able to solve this question of access. The second part of it is that it gives us a direct connection to a client base that's

• 53:48Speaker 03

  been, you know, 15, 20 years ago was a small client base and is now a really important and growing client base of Vanguard's, which is the independent financial advisor. And it allows us to serve them with products, which we've been doing for 15-plus years now, but also with enabling technologies around portfolios and rebalancing and a whole host of other things, just like we have in our workplace business and just like we have in our direct-to-consumer business. And so those were kind of two of the reasons why. I will also say, and this was really unusual, which is that because we've known Jason as

• 54:28Speaker 03

  an institution, as a company for, you know, six, seven years, because we had a Vanguard person as an observer on their board, because the connection back to Bill, there were a lot of cultural similarities between what Jason's trying to, Jason and Altrus are trying to do for advisors and Vanguard's own mission. And so kind of our sense of cultural affinity, let's just say, was strong. And certainly as I got to know him and meet him over the past year or so, that really just, that conviction grew in my own judgment as well.

• 55:05Speaker 01

  So we see a lot of public companies that have publicly traded stock, gives them a cheap source of paper to acquire other companies. I am not going to assume that Vanguard's going public anytime soon to start making more and more acquisitions.

• 55:23Speaker 03

  Yeah.

• 55:24Speaker 01

  This way. But in all seriousness, when you look at the competitive landscape, does Vanguard have any disadvantage for not being able to do those sort of either large or mega acquisitions that your competitors have been doing with their publicly traded stock?

• 55:45Speaker 03

  You know, the, one of the beauties of Vanguard is that we've managed to generate economies of scale, grow the company, serve our clients, and 99.9% of that has been organic. And what Altrus really was, was a unusual set of circumstances of an opportunity we saw to help people get more access to advice, an enabling technology, whether it's Hazel or a whole series of other workflow technologies that they built, and a series of needs that

• 56:24Speaker 03

  we had that also tied with a good sense of cultural affinity. I don't think you're going to find those circumstances kind of come together. I've done a lot of deals in my past lives. This is an unusual set of circumstances. And so first, I don't think you should view this as any great departure kind of in Vanguard and our thinking, which is going to be nearly all organic. I talked to all the bankers that came to visit me after we, after we announced it that like, this is going to be an unfruitful place for you to visit, you know, for the next half a decade or decade.

• 57:03Speaker 03

  But I think more importantly, we've been able to do a lot of things organically that have surprised people. I mean, I think Bill talked about it on your show just a few months ago. You know, if you go back in history in 2009, iShares went somewhere else as part of the acquisition. Vanguard built an ETF business organically. We've done rather well.

• 57:31Speaker 01

  Yes.

• 57:32Speaker 03

  Over the past 15, 16 years, because if we stick to these core tenets of giving clients a fair deal, keeping it simple, and really sharing the economies of scale that we're able to generate with our clients, turns out clients really like that. And that formula works and it's worked for us for the past 15 years. I think it's going to work for us for the next 15 years. And so that's, I think Altrus, I'd see as a very unusual set of planets aligning at the right time.

• 57:59Speaker 01

  It makes a lot of sense. We have been speaking with Salim Ramji. He is CEO of Vanguard. If you enjoy this conversation, well, be sure and check out any of the 676 we've done over the past 12 years. And you can find those at iTunes, Spotify, Bloomberg, or YouTube. I would be remiss if I didn't thank the crack staff that helps put these conversations together each week. Noah Friedman is my video engineer. Anna Luke is my producer. Sean Russo is my head of research. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio. Bloomberg Radio.

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