A conversation with Vanguard CEO Tim Buckley

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Transcript (lightly edited)

Maria Bruno: Hi. I’m Maria Bruno, head of U.S. Wealth Planning Research here at Vanguard.

Joel Dickson: And I’m Joel Dickson, global Head of Advice Methodology at Vanguard. Welcome to our podcast series, The Planner and the Geek, in which we’ll discuss topics that are important to individual investors.

Maria Bruno: And we’ll have some fun along the way.

Maria Bruno: Well, Joel, Happy New Year. It’s good to be in the studio with you again.

Joel Dickson: Happy New Year, Maria, and welcome to our listeners. This is our first podcast of 2019. Before we get going though with what we were planning, we definitely have to take a minute to reflect on the passing of Vanguard’s founder, Jack Bogle, which happened on January 16—89 years old. And while it’s going to be impossible to try to do justice to all of Jack’s accomplishments—and certainly from an investor standpoint there are many—we did want to spend a few minutes reflecting on Jack’s life and legacy and our own personal connection to him. He really did achieve legendary status in the investment world. Maria, you’ve known Jack Bogle longer than I have even. What are your memories or reflections of Jack? Mr. Bogle as you called him.

Maria Bruno: Oh, yes, Mr. Bogle. Joel, I have a lot of them. I’ve known Mr. Bogle since 1991. A year into my career at Vanguard, I ended up on the executive floor with Mr. Bogle and the team there. And I learned so much from him, both from leadership as well as investments. He is one of the sharpest individuals that I’ve ever come across, but yet so humble with his time and his leadership. And throughout the years, we’ve kept in touch. It’s just been a blessing to have worked with him and to work at Vanguard, and we see it day in and day out—his focus on the crew, the clients, and what we do. We live and breathe it. He’ll be missed for sure.

Joel Dickson: Most definitely.

Maria Bruno: Anyway, Joel, I could go on. But what about you? You’ve told your story before in terms of how you came to Vanguard through Mr. Bogle.

Joel Dickson: I did. It was the last podcast that I told my story of my interaction with Jack Bogle and how I got to Vanguard. The reason I came to Vanguard was Jack Bogle—completely out of the blue—sent me a note when I was working down in Washington, D.C. I’d had no conversation with Jack Bogle before. And all of a sudden he sends me this package, and that led to me being here at Vanguard. So in many ways, I am grateful to him for my own career and the little part that can be played with that in terms of broader Vanguard, the mission of Vanguard, and what has happened for investors overall. I think that has been positive. When we think and reflect back not necessarily from the personal standpoint but on the achievements, there have been many that have been talked about since Jack’s passing—which is now about ten days ago from the time that we’re doing this recording. Maria, when you think of the accomplishments from an investor standpoint or from an overall structure approach—making a difference in the industry and for investors—what comes to mind?

Maria Bruno: Well, first, he started Vanguard, right? So in 1975 he started Vanguard. He could have started the company in the traditional management form where you have an external management company running the mutual funds for a profit, but he didn’t. He started the first mutual mutual fund—which created quite a stir when he did. So, essentially, we are a client-owned firm. The shareholders own the firm, so there’s no middleman. We do the best interest for the client. The way Vanguard is structured is quite unique, and we see that in the millions of dollars of cost savings that shareholders have enjoyed over the years.

Joel Dickson: Yes. I always find it really interesting that people sometimes will do a shorthand version of Vanguard and say, “It’s a not-for-profit because it’s a co-op owned by the investors.” Actually, it’s quite profitable. It’s just that the profit is paid back in the form of lower expenses to the same people that are investing in the funds.

Maria Bruno: Right, so we’re all owners and shareholders.

Joel Dickson: Right.

Maria Bruno: That was quite unique and still continues to be quite unique.

Joel Dickson: Absolutely.

Maria Bruno: What about you? What would you add?

Joel Dickson: I would add, I think the other major sea change or accomplishment that often gets identified with Jack is the introduction of the first index mutual fund, which is now Vanguard 500 Index Fund. Back then, it was called First Investment Trust. Did I get that right?

Maria Bruno: Oh!

Joel Dickson: Oh, boy, I’m straining my Vanguard history there. But in any case, the concept that investors can do very well in terms of both saving and the returns that they get on their savings through achieving the market returns, with the least amount of cost possible in deviating or taking away from those market returns. So really focusing on, if it’s market exposure that you’re wanting to achieve, being able to do that through an index fund—minimizing the cost. On average, you should probably be doing better than the typical higher-cost approaches that were out there at the time, and even so today. And it’s just extraordinary how much that concept of market-representative return and the focus on cost as a determinant of performance expectations has really taken off. At the time it was often derided as un-American. I remember seeing posters say, “Index funds are un-American.” But it accounts now for more than 70% of Vanguard’s $5 trillion in assets under management, and really has been a big bellwether for growth in asset management throughout the industry—and not just at Vanguard in terms of index fund products and approaches.

Maria Bruno: Yes, and his message has been very tried-and-true throughout the years. He kept that message alive throughout all these years. So a couple things in terms of Bogleisms or Bogle quotes, because I can think of a few. One was, Mr. Bogle would always say, “Do the right thing.”

Joel Dickson: That’s controversial, huh?

Maria Bruno: “Even one person can make a difference.” I use that all the time.

Joel Dickson: Yes, you do.

Maria Bruno: “Stay the course.” That’s tried-and-true.

Joel Dickson: That one everyone associates with Jack, yes.

Maria Bruno: And the big one that he always uses—

Joel Dickson: Well, as many people who have heard some of Jack Bogle’s life story, a lot of his communication and approach is, look, there are bumps in the road. There are hurdles to overcome, and that regardless of what is going on, press on. And he put that together as, “Press on, regardless.”

He had five heart attacks before his heart transplant—his first one at age 31. And regardless of what was going on from a business standpoint, from a personal standpoint, that ability to be able to focus on what is important or most prominent, most key for communicating and building the business and so forth. So that concept of press on, regardless. And, in fact, with that in mind and in tribute to Jack, I think we should—for our first podcast of 2019—press on, regardless.

Maria Bruno: Press on, regardless! Agree, Joel. There aren’t a lot of people like Mr. Bogle in this world, and I think we’re all a bit richer on many levels by having Mr. Bogle in the industry and in our lives.

Joel Dickson: I completely agree. So as we press on, regardless, Maria, we did want to talk today about a couple of things that investors might consider at the beginning of 2019—looking forward into the new year—in terms of improving or thinking about their investments and their financial portfolio and their financial life. Did you make your IRA contribution?

Maria Bruno: I was going to ask you first. I did, yes!

Joel Dickson: You did!

Maria Bruno: Yes, you’re going to have to pick on me for other things. I did do my IRA contribution—feels great.

Joel Dickson: All right.

Maria Bruno: Did you?

Joel Dickson: I did. We’ll talk about that shortly. But I want to welcome our listeners. This is our first podcast of 2019, so—

Maria Bruno: Woo-hoo!

Joel Dickson: Woo-hoo! Exactly. We made it through 2018. How about that?

Maria Bruno: They signed our contract again for another year.

Joel Dickson: Yes, at the same price. We did want to talk today about a couple of things that we want to share with the listeners—a look at 2019 in terms of what are the types of financial things that you do at the beginning of the year or that you might think about going into the new year. And then we’re excited about having Tim Buckley, the CEO of Vanguard, join us to talk a little bit about his perspectives after his first year of being CEO—and now Chairman of Vanguard starting this year—and what is on the horizon for Vanguard and what he sees from his perspective at the CEO seat. And then wrapping that up with you and me talking a little bit more about some of the things that maybe folks don’t know as much about in terms of Vanguard and how things are a little bit different with Vanguard in the financial services industry—and what that means from a client perspective. That sound like a good plan?

Maria Bruno: Sounds great.

Joel Dickson: All right. Why don’t we get going?

Maria Bruno: So what’s different this year as we start the year as opposed to last year?

Joel Dickson: What’s different? Well, I’m a year older.

Maria Bruno: No, I think we were greeted with some market volatility. We saw some of that towards the end of the year, and we are experiencing that as we go into this year as well. So what does that mean? What doesn’t it mean? I think that’s a good way to start off the conversation.

Joel Dickson: Yes. Everyone gets flustered every time there seems to be some ups and downs in the overall stock market, for example. And we certainly saw that in the fourth quarter of 2018.

Maria Bruno: And we hadn’t seen much of that, right?

Joel Dickson: No.

Maria Bruno: So, it’s been a story where it’s been a lot of very rich positive market returns. We were cautioning investors time and time again to rebalance their portfolios and just make sure that they were well allocated when we saw market volatility, because we knew it was inevitable. But the volatility we’re experiencing is not that atypical. It’s just that we haven’t seen it in some time.

Joel Dickson: Yes. The thing is we tend to use our most recent experiences, if that is the normal situation. In fact, the most recent experience, as you said, Maria, has been much lower volatility than historically normal. And so you see sort of a return to normal volatility. The S&P 500 Index of U.S. stocks, sort of a large-cap barometer for the U.S. market, was down in total return standpoint about 5%—a little bit less than 5%—in 2018. You look at that historical experience and if you think of an average return and the 8% nominal range historically, down 5 isn’t good, but it’s certainly not catastrophic by any means. It’s somewhat normal volatility of equity markets. It just feels bad when you’re in it, and we always tend to think our highest balance ever is what we measure the loss against.

Maria Bruno: The other thing I sometimes think we do in the industry is focus on the indexes and the point drop.

Joel Dickson: Yes.

Maria Bruno: Which is not as relevant when you’re dealing with a higher base—you’re going to see more magnitude there. But when you put it into returns and percentages, it’s sometimes a different story.

Joel Dickson: A lot of times people will comment—

You’re right. When the point drop is what will gather the headlines—

Maria Bruno: It always does.

Joel Dickson: You’ll see the Dow drops 1,000 points. Well, 1,000 points was 4 or 5%. Not to give insignificant amounts to it—I mean, it’s certainly a shock. But then on the upside, it tends to not be points up as much as it is, “Oh, the market was up a percent today or half a percent today.”

Maria Bruno: That’s interesting. I don’t know if I’ve ever really thought about it that way.

Joel Dickson: Yes, it’s the scare thing of the number of points. But just like a dollar today is very different than a dollar yesterday, 1,000 points on the Dow is very different than 20, 30 years ago.

Maria Bruno: Yes, so that’s some context there.

Joel Dickson: Yes, I agree.

Maria Bruno: All right, so what do we do with that? Well, one, I think I would go back to the rebalancing story. Make sure that we’re well allocated, because if we haven’t rebalanced, the market has done a little bit of rebalancing for us. But it may make sense to go back and revisit your goals—make sure the asset allocation is still prudent for those goals. If not, some tweaking should be made there, right? So that’s just general maintenance, if you will.

Joel Dickson: I agree, Maria. What changed here was the markets. I think the question that as an investor you have to ask is, “Did anything change for me?” As you were saying—risk tolerance, your time horizon, your goals and objectives. If none of that changed, well, this is just normal variation in the markets.

Maria Bruno: Right. If you’ve reallocated and rebalanced and you’re well aligned, then you’re well-positioned to weather some of this volatility. Now that said, though, volatility may present some types of planning opportunities.

Joel Dickson: Tell me more.

Maria Bruno: You wrote the book on this, Joel.

Joel Dickson: Some papers, not a book.

Maria Bruno: No one reads books anymore, right? All right, let’s think about a couple of things. Before we get into maximizing tax-advantaged accounts and things like that—I think that’s always relevant—but when you think about taxable accounts, maybe there are some harvesting opportunities to take advantage of losses to offset gains and things like that. So that’s always something to consider.

Joel Dickson: Yes, it may give you a tax-free rebalance, right? You could rebalance if you find you need to. And if you have some things at a loss and you realize other things at a gain, it could net to not being particularly—

Maria Bruno: Right. And for those that are spending from their portfolios—whether they’re required minimum distributions, for instance—that may be another rebalancing opportunity. We’ve talked about this in the past. If you’re taking from your portfolio to meet spending needs, be tax smart about that. If there are gifting opportunities and things like that, certainly.

Joel Dickson: I think another one, too, is around rebalancing and if there are some opportunities to take some tax losses. If you have positions in your portfolio that were from a long time ago, a huge amount of built-in gains—maybe it’s in individual securities that are really concentrated in your portfolio, but just for tax purposes and so forth it was hard to diversify those positions—now there might be a little bit better of an opportunity to do that because of the volatility. And, again, take advantage of it to be able to restructure the portfolio in a more diversified, longer-term perspective.

Maria Bruno: And there may be consolidation opportunities as well. I think last year’s tax return—whereas we’re preparing tax returns now—the 2018 tax return can really be a springboard into 2019 planning, because maybe there’s some opportunities to be a little bit more tax efficient there.

Joel Dickson: Yes. It always seems that one of the standard, at least financial, New Year’s resolutions is, “I’m going to be more tax efficient this year.”

Maria Bruno: The focus is really just to get that tax return done and filed before the deadline and then we move on.

Joel Dickson: Yes—and then forget about it. It’s kind of like my weight loss goal. The first couple of weeks it sounded good.

Maria Bruno: That’s another podcast, Joel.

Joel Dickson: Maintenance.

Maria Bruno: All right. So check the box, we both did our IRA contributions. Yay for us!

Joel Dickson: Yes. I did it a little bit later this year though. I did it at noon on January 1 instead of when the ball dropped.

Maria Bruno: I did mine at 3:30 on the same business day, so we both got processed on the same day. It doesn’t matter.

Joel Dickson: That’s good, that’s good!

Maria Bruno: Anything else that you did to start off the year?

Joel Dickson: Well, I like to think about those things that you want working for you as long as possible—where the benefit is time in the market. So contributions to long-term accounts I tend to like to do at the beginning of a year instead of at the end of a year. So IRA contributions, as you mentioned, is one.

Another one is 529 plan contributions for my kids. That I did, also, on January 1 for 2019 to maximize the time in the market.

Maria Bruno: To get that extra year of tax-free growth.

Joel Dickson: Exactly.

Maria Bruno: Terrific.

Joel Dickson: But there have been some changes this year too, Maria. I think about how the limits that you can contribute to tax-advantaged accounts have changed in a couple of instances.

Maria Bruno: Correct, the IRA contribution limits went up an extra $500. So the limit is 7—

Joel Dickson: Oh, for you it is! Uh-oh, I was wondering!

Maria Bruno: That one hits home. Okay, it’s $6,000. But the catch-up contribution lets us invest an extra $1,000 if you’re 50 or older.

Joel Dickson: All right. Yes—just so we get that.

Maria Bruno: Just a reminder for our listeners who may be turning 50 this year, there’s the opportunity for the catch-up contribution.

Joel Dickson: And, actually, that’s a really important point. You might be turning 50 in December of 2019. You can make that extra $1,000 contribution today.

Maria Bruno: Yes.

Joel Dickson: So, any time in 2019 if you’re 50.

Maria Bruno: Yes, and the same thing goes if we extend this to retirement plan contributions as well. The 2019 max contribution is $19,000 with an extra $6,000 for a catch-up contribution.

Joel Dickson: And, again, same rule if you’re 50 or older within the year for that catch-up contribution.

Maria Bruno: Yes, you keep saying, “50 or older.” We got it!

Joel Dickson: Well, it differs. HSAs—the catch-up contribution is 55.

Maria Bruno: Oh, very good!

Joel Dickson: So, a little nitty-gritty detail here.

Maria Bruno: And it’s not over 50—it’s 50 and over.

Joel Dickson: That’s right, correct. The other questions that often come up at the beginning of the year—when we restart the clocks—are things like required minimum distributions for those that are over 70½, or they’re going to be 70½, and how we think about taking distributions. What are your thoughts on required minimum—

Maria Bruno: Yes, I think that’s a good one. I get this question a lot. I think many investors will take their withdrawals at the end of the year. And I think that’s fine. They’ll do that before the end of the year, because the RMDs must be made during the calendar year. But, for instance, now your 2019 RMD uses the 2018 year-end balance to calculate what that distribution is that has to be done by 12/31/2019.

But I often get the question, “Well, is there a better way to take it? Should I take it in the beginning of the year? Should I take it at the end of the year or throughout?” And I don’t know if it really matters at the end of the day. I often suggest that retirees think about their spending needs. Certainly, if they need the money for spending purposes throughout the year, then take it at the beginning of the year. Installments—quarterly installments—is sometimes a popular one. Many investors then will also take it at the end of the year just to make sure that they do that before the end of the year. But you don’t know what the market’s going to do throughout the year, so it doesn’t really matter in that regard. I think it’s more important to think about how you use the RMD. For those that don’t need to spend the RMD, you can certainly reinvest those proceeds in a nonretirement account. The key there is to be tax efficient; we’ve talked about that in the past. I don’t know if you feel differently, but I don’t think there’s a strong case for one way or the other.

Joel Dickson: Absent the spending discussions that you talked about during the course of the year, if we’re thinking about maximizing the time in the market, if you don’t need it, probably all else equal, taking it towards the end of the year in most situations will be beneficial—a little bit more beneficial—because you’re locked into the amount that you have to take as of the end of the previous year. So December 31 locks in what your RMD is that you have to take out of your account in 2019. The other thing—and this would be a bit more of an advanced strategy especially with some of the tax changes that occurred starting to be effective in 2018—if you’re not going to use the RMD for yourself and need it for your own spending, but instead you make charitable contributions, using that to do a qualified charitable distribution in terms of your RMD can actually be quite beneficial because of the changes to the standard and itemized deductions that occurred with 2018. So, you can get the credit for that charitable deduction off of your income that you might not be able to if you had previously done itemized deductions, but now no longer can, or no longer makes sense.

Maria Bruno: Right. That boils down to the increase in the standard deduction—

Joel Dickson: Right, and the elimination.

Maria Bruno: And the elimination of the exemptions.

Joel Dickson: Well, and the elimination of the state and local tax capped at $10,000—

Maria Bruno: Yes.

Joel Dickson: So a lot of people that may be itemized in 2017 may find that they don’t itemize in 2018, and that can affect how charitable contributions are deducted as well, because that’s part of the itemized deductions.

Maria Bruno: Yes, it’ll be interesting because we did see the tax reform go through last year. So as individuals are doing their 2018 tax return, I think they’ll get a better sense of what 2019 might look like from a tax standpoint and how to maximize some of these strategies.

Joel Dickson: I actually think there might be a future podcast on that, because when folks go through and do the 2018, they won’t realize—or they will then realize—that there were actually a number of changes that make the taxes a little bit different. I know there have already been warnings that maybe there’s underwithholding going on and that people are going to find out that they owe more when they do their taxes because of some of the changes in the withholding rates last year. It’ll be interesting to see if that happens.

Maria Bruno: All right, let’s hold that thought for maybe a future—

Joel Dickson: Sorry, the tax geek in me was getting excited there.

Maria Bruno: You’re getting really excited, Joel. Calm down. All right, let’s talk Tim for a little bit. We had the honor of having Tim in the studio with us. It was good to chat with him and get his thoughts in terms of his first full year, what his thoughts are, and touched upon some things around the competitive landscape, the markets. So I think it’s a good time to segue in and share our conversation with Tim.

Joel Dickson: Tim, thanks for joining us. You’ve been CEO for just about a year now. Tell me a little bit about what your observations have been.

Tim Buckley: Well, first, thank you for having me on with this famous duo.

Maria Bruno: Thanks for being here.

Tim Buckley: You bet. Year one observations—Joel, I think what really stands out in the first year, what’s really made an impression on me, is the value—the power of the Vanguard brand and the value of what Vanguard offers. And it sounds odd, Maria, for me to be saying that—27 years around Vanguard and you just realize that—but it’s a little different in this seat. A little bit different in one big way. You’re more recognizable. For some reason that means people are going to more likely have a conversation with you about Vanguard. And that’s what invariably happens. So you’re on a flight to Boston or the West Coast and someone will strike up a conversation with you. It will start off with talking about fund returns or low cost or the mutual structure, or maybe the great service they had from one of our associates. And then, obviously, it comes down to, at the end of the day, the trust that they have with Vanguard—and it’s pretty powerful. But in there, there’s also this hidden message of, you better not screw that up. And that’s something we will never take for granted—the trust that clients put on us. And the other part of the brand that stood out is how much it’s getting under our competitors’ skins. If you look at our—Maria, you and I have been around Vanguard about the same amount of time—

Maria Bruno: We have, yes.

Tim Buckley: So, 27 years at Vanguard, I have never seen such pointed competition where we have competitors trying to slow down our advance and undermine our value proposition. And those two big things around our brand, around what we do for clients, have stood out to me in the past year.

Maria Bruno: So tell us more about that, Tim, in terms of the competitive landscape, some of the pressures that we’re seeing, or concerns you might have.

Tim Buckley: Maria, really to understand the competitive landscape, you have to look at the past decade. If you go back over the past decade, Vanguard has led in cash flow each year for the past ten years. That’s pretty impressive; it gets you noticed. And in the past year, we took in three-quarters of all cash flow to the industry, so that really gets you noticed. Not so much by clients, maybe by the press, but especially by competitors. They’ve looked at it, and they obviously look at it and say, “Where’s that success coming from?” They see our success with low-cost index funds, with target-date funds. And so their response is predictable. They say, “Well, let’s slow down those or let’s imitate what Vanguard’s doing there. Let’s offer our own low-cost index funds.” But, Joel, they don’t get it. They don’t get that it isn’t about just low-cost index funds—it’s so much more. It’s the fact that we’re a mutual structure, that we put our clients first in everything we do, we believe in low cost across your whole portfolio. No, at Vanguard, it’s about being low cost whether you’re in index funds or active funds or money markets, not just in one particular fund. It’s your whole portfolio, advice included.

Joel Dickson: When we think about advice, you have talked during the first year about advice becoming even more important from a Vanguard perspective. How do you think about that, and why has that become so important?

Tim Buckley: Well, the two of you know this well, Joel, that investor success depends on two things—the products they use and the advice that they get. You can boil it down to that. For four decades, Vanguard’s been revolutionizing the product world. We have been pushing costs lower; been riding the wave of innovation behind index funds, ETFs, target-date funds; and helping change that world. And hopefully we look back, we’re proud of our impact, and hopefully we expect it to continue, and hopefully people appreciate it. Now you look at, “Where can we turn our attention?” Advice is a great opportunity. In the average person’s portfolio, if you asset-weight it, they spend about 1.3%, 130 basis points, in costs. So they spend that to have their portfolio run, both in products and advice, etc. 75% of that, three-quarters of that cost, is advice. So if we really want to lower the cost of investing, we now have to turn our attention to advice. The huge benefit there is that technology is a wind in our sails. It’s helping us along the way. It’s really at this tipping point where it’s making the cost of providing advice lower, making it easier to use, making it more accessible. The typical activities of an advisor—well, what they would have been in the past—with asset allocation and rebalancing your portfolio, being tax efficient, doing the right drawdowns, doing tax-loss harvesting, all these things, they’re logic based. And if they’re logic based, they can be programmed and automated very easily. What you would have paid 100 basis points for before, now maybe you should only be paying 30 or less. And we know this because we’ve actually built it ourselves. Joel, you’ve been part of a team that’s helped automate a lot of this, and all of that is contained in our current offer in Personal Advisor Services, PAS, which we offer at a disruptive price of 0.3%, of 30 basis points. And that takes the best of a Certified Financial Planner [professional] and the best of technology and marries them together. We would love to use that as our springboard for the future where, as you both know, we can take that offer and move that into 401(k) plans. We can allow like-minded advisors who we serve to use that same technology within their own firms. At the end of the day, what we’re looking to do is lower the cost of advice and improve the quality answer for not just the clients that come directly to us, but all of those who believe in our philosophy—whether they come through an advisor or 401(k) plan or directly to us.

Joel Dickson: So being as disruptive in the advice space as we have been in the product space—is that what you’re looking for?

Tim Buckley: That is the aim.

Maria Bruno: So, Tim, let’s talk a little bit about 2019. What can we expect on the horizon this year? Any changes, anything for us to focus on that you’re focusing on?

Tim Buckley: Yes, Maria, I just talked about one with the new aspect. Expect us to do more in advice, whether with our direct clients, or with our advisors who use Vanguard funds, or through 401(k) plans. Expect more on the advice side of things. But the elements that won’t change about Vanguard—we have to make sure we have the best funds and ETFs in the business. I mean, that’s the ante. And you know our aim is to make sure that 90% of our funds outperform their competition over the long term. We define that as ten years, that’s the long term. Currently, we sit at 89%. So, Joel, that competitive side of us—that irks us a little bit. We’ve got to get that 89 back up to 90 or more, and we do that by making sure we have the best team in the business. We continue to invest in the people on the investment side, whether internal or our outside managers. And people often think, well, how about the index side? The index side is a lot more complicated than people think. And you have to have the right technology, you have to have the right people—it’s an art, it’s a science, just like it is on the active side. So, we’ll continue to invest in the people there and the technology. We like to also couple that with great service. It’s what Vanguard has become known for. In fact, if you look at what we like to call our Net Promoter Score—people have heard of it in the industry, it’s a loyalty score. When you measure Vanguard’s, it tends to be, or it is, twice that of our nearest competitor. We want to make sure we maintain that. Having great service is part of that. We have raised the expectation of where our service should be. The downside of that is when you have a slipup, when you stub your toe, everyone notices. But we have to own that, and we have to get better each year. So we’ll spend well over a billion dollars invested. We’ll invest that in our technology to improve our service, our client experience. So if you take those things—great thoughts, great client service, add advice to it—we think we have a pretty powerful value equation going forward.

Maria Bruno: Great. Now the one thing we haven’t talked about as we enter 2019 is the market volatility.

Tim Buckley: Well, you’re The Planner and the Geek—you guys are supposed to give me the advice on that one.

Joel Dickson: Stay the course, Tim.

Tim Buckley: Yes, stay the course. Well, Joel, that is the right answer. I think what people don’t realize is 2019 is really a return to normal. The past seven years, you’ve had this abnormal environment of extreme monetary policy. We’ve essentially had a safety net underneath the markets, which muted any potential volatility. There would be bad news out there in the global economy and the market would go up. And you couldn’t explain it. Well, now they’re more rational. Now we see—there’s a government shutdown or there’s a trade war, or as those fears get higher and the reality strikes, the markets get more volatile. That is rational. That’s the way they should behave. Now the level of volatility right now is above the long-term average, but it’s not extreme volatility. We’ve all seen that. We don’t necessarily want that back.

Joel Dickson: Yes, we don’t want that.

Maria Bruno: No.

Tim Buckley: That said, what do you do about it? What you do about it is you stick to your plan. I love this question you get all the time, “What should I do with my portfolio?” Well, the whole reason you have your diversification is for times of volatility—not for the good times. It’s to weather the tough times. You have your bonds so that the keel of the ship, it’s the ballast, it stays down in the storm. And you have your equities to be the wind in your sails and that will push the ship forward. Just always remember that. So when it’s rocky, when it’s volatile, rebalance into it, but stick to your portfolio. And I know that’s a message you always have, but that doesn’t change.

Joel Dickson: We talked a little bit about growth and competition, especially from a U.S. perspective. What about globally for Vanguard? There’s been a lot that we’ve been doing outside the U.S. Does that continue? Do we continue to grow that from your perspective?

Tim Buckley: Joel, it’s one of those things we realized a few years back that the Vanguard value equation really doesn’t know borders. It doesn’t stop at the borders of the United States. It resonates around the globe. And so we’ve found some markets where we’ve gone deep, where we’re not—I wouldn’t say duplicating—but coming close to the offer we have in the U.S. And that might be Canada, it might be Australia, and, in particular, the U.K. If we look at the U.K., we certainly have ETFs, we have domestic funds, we have a direct offer that we recently launched there. And that’s grown in a short period of time over to a billion sterling in investor assets. Small relative to the rest of Vanguard, but exciting for the growth rate that we see behind it. So we’ll be deep in a few markets where you’ll see Vanguard.

As far as the rest of the globe, we’re bringing our low-cost indexing, our low-cost expertise, to the rest of the globe through our ETFs. So whether it’s a developed market or developing markets, we’re able to access those markets with our ETFs through the different exchanges out there.

Joel Dickson: You mentioned earlier on, Tim, about the importance of the brand and what comes with that. Do you find that’s easily transportable outside of the United States? And can it even be accelerated?

Tim Buckley: Joel, yes and no. When you’re dealing with the press, when you’re dealing with the professional investors—they tend to know Vanguard. When you’re dealing with what would you call the retail investor in the U.K. or in Australia, they wouldn’t have known Vanguard before we showed up. So it’s not one of those things where everyone’s been waiting and here we are and everyone’s ready to buy! There is some kind of investment you have to make there. So it’s a slower burn, but we’re seeing some really nice progress. An entering effect, I will notice, makes it tougher for us this time around.

When we show up in a market, our competitors—well, they know us, too. So the first thing they do is cut price. If they really believed in low price, they’d cut it before we even showed up in a market, but when they know the threat is there that we’ll introduce price competition, they try to get ahead of it.

Joel Dickson: In some ways, they don’t want to make the mistake of giving us a beachhead—

Tim Buckley: That’s exactly it. So if they could turn back the clock of the U.S., you know how they would behave.

Maria Bruno: Tim, can we go back to technology? As we think through technology and our investments in technology, I think it’s worthwhile to touch upon cybersecurity. That’s at the forefront of a lot of what we do and concerns for investors. We are a virtual organization, so investors are used to dealing with this, but give us your thoughts. How much are you worried about cybersecurity and safety?

Tim Buckley: Cybersecurity, Maria, is my number one worry—my number one, two, and three. And it should be everybody’s. Any CEO or anybody working at Vanguard or any shareholder—it’s a logical worry. That’s why it is our number one investment each and every year. You can’t just worry about it; you have to do something about it. So it’s our number one investment, and we look to make sure we have top-notch people on our cyber team. It is the one place where the industry shares information—where competitors talk about what the threats are out there. You make sure you have state-of-the-art technology, and you never rest on your laurels. You figure out what are the best practices, and let’s be in that state of the art. Never think of yourself as, “We’re done. We’re impenetrable now.” Because you’re always vulnerable, and you have to keep pushing. So we’re never complacent on that.

Joel Dickson: Tim, let’s roll the clock forward five or even ten years from now. When you think about where we are evolving to as an industry and what clients would expect and should expect from us, what would your vision be? What’s different or what has evolved over the course of the next decade or so?

Tim Buckley: That’s a great question. We try to picture what’s out there. What would that future look like? And you’re never right. Would anyone have pictured the growth of target-date funds and ETFs? We’ve been pioneers in them and we haven’t. We wouldn’t have pinned this down like the way it is today.

I think the biggest change you’ll see would be advice, because that’s where technology has the greatest advancements, and you’ll see much lower-cost advice. You’ll see it much more accessible. It will be much more of a default way of investing. It will be more integrated in your life where you have to do less.

I think you’ll see a world where someone enrolls in their 401(k) plan, and they’re automatically enrolled in advice, not a target-date fund. Using AI, we understand what the risk profile would be. And we start investing according to what that risk profile would be. And over time, they’re going to have different objectives. They’ll tell us they want to put a kid through college, buy a home, and we’ll be able to accommodate those goals and adjust their portfolio for them. We’ll anticipate, as they approach retirement, what their healthcare needs will be. We’ll understand what kind of income they’ll need in retirement. None of it with asking them questions, but just by understanding their needs, their behavior, and understanding that client better. And technology will let us do it. You probably could comment on that better than I could. You have helped us advance there in how we’re leveraging AI and advice. But I think the industry will change the most in how we use advice. That’s where the revolutionary change will happen. I think you’ve seen a lot of it on the product side already.

Joel Dickson: That mass personalization or that mass customization that comes into play, right?

Tim Buckley: That would be the headline—mass personalization around advice with a lowering of the cost. Make it more accessible.

Maria Bruno: Tim, could I ask a bit of a different question? When we talk about the three Cs—clients, crew, and community—when you think about the veins of Vanguard, can you talk a little bit about that? We’ve talked about clients, but can we talk a little bit about crew and community? Why are you smiling, Joel?

Joel Dickson: I’m happy.

Tim Buckley: He loves all three.

Joel Dickson: Exactly.

Tim Buckley: Well, we think that’s part of the vitality of who Vanguard is. And it’s hard to separate them. If you look at our clients, we serve our clients well by having great crew. We want to make sure we’re always investing in crew. So when people join here, we talk to them about—you’re going to enjoy the rest of your career. This is not a job. Your career’s going to be here. We’re going to invest in you, and we’re going to move you from job to job, build competency to competency. You’re going to take different courses. You may become a Certified Financial Planner [professional]. Maybe you’re going to invest money; maybe you’re going to be a great relationship manager. Whatever the case, we’re going to invest in you. So we always invest in our crew just like we do in the client relationship. And the crew come from our community, so we believe in giving back. Maybe it’s part of our nature that we are very mission-based, but we believe in giving back to the community. And our crew love to do it. So, it’s great camaraderie around here. It’s pretty amazing that the crew at Vanguard, as you know, give back more than $8 million a year of their own money to their local communities and get very involved in giving back.

Joel Dickson: We want to thank you for joining us, Tim. One last question. A lot of the time that we’ve spent over the last several decades has largely been in helping people save for their retirement. We now more and more are having to think about what’s happening in retirement. How do you see that? No one’s really solved that it seems. Is that going to be an important element of helping people not just save but then also spend and live the life that they want?

Tim Buckley: I had an early mentor at Vanguard. And he once taught me that there’s a difference between a problem and a dilemma. A problem has a solution; a dilemma needs to be managed.

Someone’s income needs in retirement is more of a dilemma. It’s not a problem to be solved; it’s something to be managed. And I would tell you that many people out there today do it extremely well. Our goal just has to be how can we do it easier for them? I would say with most Vanguard shareholders in retirement, they live below their means. You both have seen that time and time again. And when times get tough, they cut down their savings—which they should do—but they do that too much. And they worry in the good times and are not spending. And you know what, maybe they could be living a little bit better.

So, what we’d love to be able to do is give them advice so that they can live life to the fullest, and we’ll help them manage through that in retirement.

Maria Bruno: Great. Tim, thank you for joining us today. We were thrilled to have you here.

Tim Buckley: My pleasure. Thanks for inviting me. And I wish everyone a fabulous 2019. I hope we have very positive markets for everyone. But if we don’t—stay the course. I told you I’d get that in there, Joel. Stay the course throughout all the volatility and keep that long-term perspective.

Joel Dickson: It’s always good to hear from Tim and get his perspective on Vanguard and the approach. What I really took away, in many ways, is the importance of reinforcing the brand. At the end of the day, we’re trying to be here for clients. And what’s good for the client is, ultimately, what’s good for the owner of Vanguard in our structure.

Maria Bruno: Yes. Being the mutually owned mutual fund company and our corporate structure helps us, and enables us, to do the best thing for our investors and give them the best chance for investment success. Tim talked a little bit about staying the course in the choppy markets that we may have started to see, and we’ll see what 2019 brings. But the only thing I would reinforce is—we’ve talked about this in the past—it doesn’t mean not doing anything. It means looking at your asset allocation, rebalancing, those types of things. I can’t underscore that enough.

Joel Dickson: I think the message that resonates across all of the different things that we talk about in terms of success for clients is focusing on what clients know and can control and trying to manage those elements that you don’t have control over. We talked about market volatility earlier on the podcast. Well, clients can’t really control market volatility. We don’t know when it’s going to occur, but we can manage it by how we build a diversified portfolio. But costs or what our taxes are, those things we can control a little bit more because we know our own situation and how it could be affected by it.

Maria Bruno: Yes. Taxes is an interesting one because we can’t control the regulatory or the tax landscape at all times. The best we can do is position our portfolios as tax efficiently as we can, and then make strategic choices in any given year to try and maximize those benefits. So, again, we talk about asset allocation, tax diversification—those types of things that can help us as investors be better prepared for some of the unknowns that we might face.

Joel Dickson: Yes. And the other element, too, is around what can be automated. What can you put on autopilot in certain ways? It used to be thought that you always had to have a portfolio manager to guide individual investments. And while that still presents the possibility of excess returns, maybe a passive approach, an index approach, can give you exposure as well. There’s a portfolio manager there, too, but for different purposes of trying to give you the return on the market. From an automation standpoint, a lot of what historically has been thought about as, I’m going to create an individualized plan for you and your long-term goals—well, we know what the tax rules are. We know we can automate some things like portfolio construction. However, we still need that guidance around what are the goals and objectives that you bring, and how we then marry that with the things that we can do in a more automated, personalized, customized way.

Maria Bruno: Tim talked about advice quite a bit. That’s one example of that in terms of automation and how, when you think about advice in the past, it’s very portfolio-based in terms of how to save, how to draw down. But when you think about it holistically, it’s these other choices we talk about a lot in terms of how you put the pieces together to maximize after-tax wealth. I think that’s where there’s a big benefit to many investors in seeking professional guidance.

Joel Dickson: Yes. And maybe the next frontier, if you will, in the investment world will be around how you then add value on top of that portfolio construction—that low-cost, globally diversified portfolio construction—to meet your objectives and needs—and then the other elements that you can bring on top of it.

Maria Bruno: Yes. And it wouldn’t be a conversation with Tim without discussing cybersecurity and the importance that we place there, so that’s always good and reassuring to hear and a constant challenge for us.

Joel Dickson: A constant challenge for everyone in the industry.

Maria Bruno: That’s true.

Joel Dickson: It is the big thing. If you’re online in any way, shape, or form, cybersecurity is always going to be a concern.

Maria Bruno: Well, that was a really good discussion. It was good to have Tim in the studio. Good to talk with you, Joel. I’m certain that our listeners got a lot from that conversation today.

Joel Dickson: And continuing with our podcast series, next month we will be talking about planning for healthcare expenses in retirement, which isn’t just a retirement topic—thinking about the planning that may be required as we think about the type of spending that would be needed in retirement. So join us then.

Maria Bruno: We hope you enjoyed this episode of The Planner and the Geek. Just a reminder that you can find more episodes of The Planner and the Geek on iTunes and on vanguard.com.

Joel Dickson: Or simply subscribe to our series and you won’t miss an episode. And please don’t forget to rate us on iTunes. Your ratings will make it easier for others to find us when they’re looking for investing podcasts. Please join us next time for our next episode of The Planner and the Geek.


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