Early in my Vanguard career, I accompanied Vanguard founder Jack Bogle to a meeting in New York City. I’d never traveled anywhere with the founder of a multi-billion-dollar anything before. Would we chopper up to the East 34th Street Heliport? Or would we take a limo?
The reality was more Vanguardian. When we detrained in New York’s Penn Station, Mr. Bogle asked me to buy two subway tokens for the journey uptown. This was a business trip, and we had to watch our basis points. I guess I hadn’t yet internalized a phrase used by Mr. Bogle’s successor, Jack Brennan: “Glamour is the name of a magazine; it has nothing to do with life at Vanguard.”
Our unique culture
I thought of my early encounters with the Vanguard culture as I watched a recent webcast with current CEO Bill McNabb. A viewer asked Mr. McNabb how we could continue to “treat every client as if he or she is the most important,” even as the number of clients and the amount of assets under management increase rapidly. Mr. McNabb’s reply: Because of Vanguard’s client-owned corporate structure and the Vanguard culture.
The benefits of Vanguard’s corporate structure are easy enough to understand. The importance of culture is trickier. How can the Vanguard culture ensure that we treat all clients as “honest-to-God, down-to-earth human beings, each with their own individual hopes and fears and financial goals,” as Mr. Bogle puts it?
I think the answer has something to do with subway tokens, the values modeled by Vanguard’s leaders, and the norms and behaviors absorbed and perpetuated by everyone who works here. Almost as soon as I scampered aboard the HMS Vanguard in 1997, I recognized that the Vanguard culture was unique, reflected in the way we manage costs, provide service, and decide what kind of investments to offer.
A good use of the client’s money?
Cost-consciousness is a prominent feature of the Vanguard culture, fostering a mindset that I would describe as “frugal, not cheap.” After all, the less our clients pay, the greater their share of an investment’s return. In our annual budget meetings, each line item is evaluated according to the same question: Is this a good use of the client’s money?
If the answer is “yes,” we’re happy to spend. Two decades ago, Vanguard invested heavily in vanguard.com. The up-front investment was significant, but our analysis suggested that, over time, a world-class website would allow us to serve more clients at a lower cost, generating economies of scale that would trim expenses for all shareholders.
Vanguard.com has since become our clients’ preferred means of interacting with us. At the same time, the favorable economics of web-based client service have helped us to steadily chip away at Vanguard expense ratios. At the end of 2002, average expense ratio was 0.28%. At the end of 2013, the figure was 0.19%, compared with an industry average of 1.08%, according to Lipper, a Thomson Reuters Company.
The attention to costs and client benefits is also evident in less momentous acts. For example, a colleague of mine used to scavenge paper from the recycling bin and feed it back into the printer so that we wouldn’t waste a blank side. A penny saved is a penny earned for the client. (Today, our printers automatically print on both sides.)
In every role, a focus on the client
“We have to get you trained for Swiss Army.” The remark had nothing to do with Switzerland or military service.
I was new to Vanguard, and my boss told me that I needed to learn how to answer client calls or process transactions so that I could pitch in during busy periods. (“Swiss Army” is a reference to Switzerland’s compulsory military service.)
When I strap on a telephone headset, I sit among accountants, portfolio managers, and coders who have taken a brief break from their primary duties. It’s a powerful reminder that, whatever our role, our first responsibility is to the client.
Does this fund meet a genuine investor need?
The connection between the Vanguard culture and our investment offerings is the belief that success demands a long-term perspective, a principle that informs both our business planning and investment thinking.
In a vanguard.com interview, CIO Tim Buckley discussed our approach to new fund launches. “First and foremost, Vanguard bases all new fund launches on investor needs and not on the current market environment,” he explained. “We develop new offerings that we believe fit into a long-term portfolio, and that are enduring and low-cost.”
As tech stocks surged in the late 1990s, clients and consultants urged Vanguard to create an Internet fund. We knew that we could offer such a fund at a cost below those of existing Internet funds. But it wasn’t clear that a narrowly focused portfolio made up of highly valued companies with scant earnings met an enduring investment need.
Tech stocks eventually collapsed, but our decision not to offer an Internet fund had nothing to do with forecasting wizardry. It reflected the discipline imposed by a culture committed to clients’ long-term investment needs.
A sense of mission
The Vanguard culture reflects a sense of mission that has galvanized Vanguard since its founding as the first client-owned mutual fund company.* It continues to influence our relationship with all clients, even as more investors bring their assets and financial goals to Vanguard.
*Vanguard is client-owned. As a client owner, you own the funds that own Vanguard.