Not long after Salim Ramji moved into the C-suite offices at Vanguard’s main Malvern campus last summer, he decided to do some redecorating.
The new chief executive instructed facility managers to retrieve an oil painting of the British ship of the line that gave the asset manager its name. The artwork, chipped gold frame and all, was recovered from a basement and now hangs in Ramji’s office.
It was a clear gesture of respect for Vanguard’s heritage from the first outsider to run the money manager. But in many other areas Ramji, who was poached from larger rival BlackRock last year, is there to drive big changes at a company whose culture and ethos are still shaped by its late founder, John Bogle.
“You want to keep . . . that sense of what has made us special for 50 years and take the Vanguard effect and innovate and disrupt and unleash our team,” Ramji tells the Financial Times. “The mission around low cost still has a long way to go.”
The world’s second-largest money manager has fundamentally reshaped equity investing. Its relentless emphasis on low costs and simple products that track indices rather than pick stocks has helped create a $10.1tn pile of assets under management (AUM) and a client base of more than 9mn direct investors, many of whom proudly call themselves Bogleheads.
Based in suburban Pennsylvania, far from Wall Street, it runs the world’s largest traditional mutual fund. Another of its products is rapidly closing in on the top spot among exchange traded funds.
For much of its history, it catered mostly to do-it-yourself investors and employee-directed retirement plans. Though its online offerings were clunky compared with rivals, and its customer service lines had limited hours, investors were rewarded with low fees that led to superior returns.
Having forced rival asset managers to slash fees and rethink business models built around stockpicking, Vanguard is now taking aim at other parts of the financial services industry. Ramji is spearheading pushes into investment advice, actively managed bond funds and cash accounts.
The strategy seeks to make Vanguard the financial destination for a new generation of investors and enable it to compete more assertively for customers outside its US heartland.
“They’ve taken the indexing thing about as far as they can,” says Dan Wiener, who founded an investment advisory business and newsletter focused on the company’s funds.
But the shift comes as many rival asset managers are now matching it on fees, while fintech upstarts such as Robinhood and Betterment have been wooing younger investors with sleek apps, free stock trading and algorithm-driven online advice. Vanguard will have to raise its own offering if it is to compete.
Meanwhile, many of its older customers are reaching retirement age and need advice on the complexities of drawing down their pension pots. “Vanguard is the sleeping terror for US wealth managers,” says a senior executive at a major Wall Street rival. “If it wakes up, it will swoop upon the complacent cottage industry of financial advisers, and tear it apart.”
Venturing into financial advice defies the instincts of Bogle, who died in 2019 but spent a lifetime urging investors to “minimise the croupier’s take”.
“It’s really a problem of size,” says Dan Sotiroff, a senior analyst at Morningstar who follows Vanguard. “They are getting so big that they have to deliver what they promise to clients.”
Naval references abound at Vanguard’s campus in Malvern, west of downtown Philadelphia.
The main buildings are named after ships in Nelson’s fleets — Victory, Goliath and Majestic. Employees are known as crew, executives are dubbed officers, the main cafeteria is the Galley and the fitness centre is called ShipShape.
Ramji likes to regale visitors with the story of the Vanguard, Nelson’s flagship in the Battle of the Nile in 1798, when the British admiral’s aggressive new tactics paved the way for the Royal Navy’s 19th-century global dominance.
The nautical theme was down to Bogle, a keen sailor and student of British naval history. But his continued influence at Vanguard goes far beyond the nomenclature.
For years, Vanguard has had the wind at its back thanks in part to the unusual ownership structure he set up after spinning it out of Wellington, the venerable Boston area money manager.
Vanguard is owned by the investors in its funds rather than by outside shareholders or a founding family. That means profits left over after investing in technology and new products are returned to investors in the form of fee cuts.
“We are the only firm that I can think of that is owned by our clients . . . It certainly makes us different,” Ramji says. Bogle “galvanised the whole crew around this sense of mission and this sense of purpose”.
Fee cuts were just one way Vanguard helped retail investors save for the long term. It was an early adopter of “no load” funds, which do not pay commissions to brokers, while its tracker funds charged much lower management fees than stockpicking rivals.
Even when Vanguard partnered with outside managers to offer actively managed funds, it used its size to negotiate lower fees. That allowed Vanguard funds to offer superior returns, because investors kept more of their money.
But Bogle’s approach had a downside when it came to keeping up with a rapidly evolving industry that was beginning to embrace new technology. Vanguard was seen as a cheapskate, so focused on keeping costs down that it forced customers, counterparties and employees to contend with unreliable technology, outdated online offerings and patchy service via telephone. A 2021 effort to modernise its app was so unpopular that many customers simply deleted it.
“[Bogle] was so focused on minimising cost that when people said, ‘Hey Jack, we need more computing power,’ he would reject it, because computers are expensive,” says Charley Ellis, a passive investing pioneer who served on Vanguard’s board in the 2000s. “In terms of capital costs, yes computers are expensive. But as a means of bringing future operating costs down, they’re very, very effective.”
Vanguard’s growth strained its infrastructure, and bulking up financial advice and adding cash accounts will only increase the pressure, because those customers expect instant access to their money and more personalised service than traditional set-it-and-forget-it fund investors.
Ramji and other executives contend that the group is ready for new challenges, having spent close to a decade revamping its technology and building up expertise in financial advice. It has also honed its approach to international expansion, after previous forays abroad yielded mixed results.
Vanguard’s leadership began to widen their ambitions well before Ramji’s arrival last year.
Its push into active bond funds emerged naturally from its growing presence in passive fixed income. In 2015, its total market bond index fund became the world’s largest bond fund, and its fixed income AUM has gone up by more than 150 per cent to $2.5tn since then.
That growth has made it easier to attract top traders and portfolio managers, according to Greg Davis, the group’s president and chief investment officer, and allowed it to introduce new funds.
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“There is a real opportunity to spread the Vanguard effect in fixed income, even relative to where we are today,” Ramji says. Performance has been strong: 92 per cent of active funds have outperformed their benchmarks over the past five years. In early February, Vanguard announced fee cuts that bring down the average expense ratios on its active bond funds to 0.10 per cent, less than a quarter of the industry average.
“People think that Jack Bogle was about index funds, but he was really about low cost,” says Sara Devereux, who was recruited from Goldman Sachs to head fixed income in 2019. “Fees matter, sometimes even more in active [than index funds] because if you have a high fee, you may feel pressure to take excess risk just to meet it.”
The bond fund drive also positions Vanguard to rake in new assets when US retail investors, who have $2.7tn parked in low-risk money market funds, start to move off the sidelines.
Bonds are historically more attractive to investors when interest rates stay elevated, and the sector is also expected to benefit from demographic changes: bond funds generate income, which becomes increasingly important to investors as they age.
Vanguard’s foray into wealth management and financial advice is potentially even farther reaching, rivals and analysts say. The idea is to democratise a business traditionally reserved for wealthy clients, who have millions to invest and do not blink at paying 1 per cent of their assets each year for a personalised service.
The company launched personal adviser services in 2015 and added a digital-only robo-adviser in 2020. It already has more than $900bn in advisory assets, making it a big player in a highly fragmented industry.
“Low fees, novel price transparency, operating scale, great brand, unlimited resources — it can’t lose,” says the senior executive at a rival firm. “Unless it stays asleep.”
Vanguard last year cut the minimum account size to $100 for digital-only advice and charges a maximum of 0.2 per cent for the service. Clients with at least $50,000 can graduate to a combination of digital and live advice for 0.3 per cent. Vanguard plans to keep costs down by using video and artificial intelligence to help advisers serve more clients, more effectively.
To kick the advice effort into high gear, Ramji has carved it out of the broader retail business and brought in Joanna Rotenberg, who played a similar role at Fidelity and Canada’s BMO, to run it. Much of the effort is focused on previously untapped markets; three out of four new clients last year had never paid for advice.
“If you get somebody young, they are probably going to stick with you unless they have a really bad experience . . . one tier is sort of the gateway for the next one,” says Sotiroff, the Morningstar analyst. “This is the next big move for Vanguard because the investment stuff has been picked over.”
One potential mother lode could be Vanguard’s existing retail customers — at present, only 5 per cent of them pay the firm for advice. Rotenberg describes how her father, “a dyed-in-the-wool self-directed customer, a Boglehead for life”, reached his seventies and wanted help sorting out his retirement spending: “He actually moved out of Vanguard to another firm because, in his perception, Vanguard didn’t have those capabilities.”
Another new business that could broaden its reach is cash management accounts, which the company is now offering five years after a prior attempt was abandoned.
These pay higher interest rates than other money managers and many banks — currently 3.65 per cent — and allow instant access through a digital app. Thanks to partner banks, deposits are protected by government insurance.
The group hopes to appeal to young people who have proportionately more of their savings in cash, and build lasting relationships with them. Cash customers “are far more engaged with us and that gives us more opportunity to nudge them to be better investors,” says Matt Benchener, head of Vanguard’s personal investor arm.
All of these ambitions will founder, however, if Vanguard cannot shed its long-standing reputation for stale technology and poor customer service.
Clunky digital offerings, periodic online outages and long phone wait times have been common. That may have been tolerable for long-term investors who traded infrequently, but not for banking customers expecting instant access or those taking AI-enhanced investment advice.
Chief investment officer Nitin Tandon insists the company is ready. In the six years since he joined from consultancy Deloitte, Vanguard has gradually increased its technology spend to more than $3bn annually and recruited widely. A third of Tandon’s division comes from outside Vanguard, a rarity in a business where most of the “crew” are long-time employees.
Much of the early IT work was concentrated behind the scenes, where years of under-investment had left the company reliant on a spaghetti of mainframe computers that were hard to work with and prone to outages.
“We were not getting the velocity we needed to modernise the client experience . . . even simple changes became heart surgery,” says Marco De Freitas, head of retail client experience, who joined from TD Ameritrade in 2019.
These days, more than 80 per cent of Vanguard’s computing is based in the cloud, with the rest expected to follow soon. A company that once could manage only quarterly software deployments now makes daily updates. Reliability has improved; Vanguard says that its network has gone from 43 hours of outages in 2021 to just two in 2023 and last year.
Both the website and the digital app have been updated to make them easier to navigate and personalise, and Vanguard is now able to offer some of the basic functionality — like the ability to deposit cheques by photograph — that customers expect from their banking apps.
Improved technology has made it easier for clients to complete their business online, leaving the phone lines free for those with complex questions. Call answering times have dropped by 75 per cent since 2021, Benchener says. Morningstar recently awarded Vanguard’s digital adviser service the only ‘high’ rating in its latest survey, placing it ahead of key rivals like Schwab and Fidelity.
But with millions of individual customers, two hours of downtime affects a lot of people and even small technical glitches — a screen that briefly shows an account has no balance, or an inability to link outside accounts — reinforce the perception of poor tech.
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“You can see the website is redesigned. Maybe it’s a little bit cleaner [as a] user interface, but I still regularly hear from people having issues,” says Jeff DeMaso, who relaunched Wiener’s newsletter as The Independent Vanguard Adviser. “It is starting to do some damage to the Vanguard brand . . . but Vanguard has a lot of good will and I don’t think that’s in jeopardy.”
Vanguard is also investing heavily in AI to help route online and phone contacts to the right information more quickly and help steer them through simple processes. It centralised data analytics in 2022 and then launched a new effort called CX Alpha that seeks to use behavioural economics to help people to make smarter investment decisions.
Early efforts include offering clients who are selling securities help in minimising their taxes and nudging clients who have deposited a large cheque towards investment funds.
Vanguard executives say this is their future. “We want our client experience to be intuitive, easy. [But] we’re not looking to differentiate on how sleek it is compared to an Amazon or a Google,” Tandon says.
“We want to differentiate on whether it drives better investor outcomes.”
Additional reporting by Madison Darbyshire