Vanguard CEO Tim Buckley faced a roundtable of journalists on the sidelines of the Morningstar Investment conference this week, sharing his views on some of our biggest burning questions about index and active investing.
Is there a retirement crisis?
Buckley: We can always do a better job helping retirees, and advice will play a huge role in that, and the price of it. Technology is going to help drop the price of advice and its accessibility and quality.
Every retiree has different needs, and technology will also help with customization of the answers as well. When people talk about a “crisis,” people talk about savings and accumulation, and there have been huge strides in that.
What the target date fund has done as a qualifying default has been phenomenal—the cash flow we’ve seen into that! When you default into a money market fund, there’s a crisis. But when you default into a target date fund, you’re getting a better answer and you’re in a better position going into the future.
How do you see advice evolving at Vanguard?
Buckley: Expect us to invest more and more in advice. We’ve been after advice since 1995. I’ve been involved with many of the efforts and many of the failures.
We’ve learned a lot. If you look at our current advice offering, our Personal Advisor Services (PAS), it’s growing 70% a year. It’s been incredibly successful because we’ve been able to combine advisors with technology to come up with a low-cost answer at 0.30%. Expect us to expand that work.
The technology behind that is largely digital, there’s a lot we can do with that, both in helping plans and also in helping advisors. Advisors ask all the time for the PAS technology, and we’re building that module so that it can actually be used by advisors.
We’re here to help clients, whether they come directly to Vanguard or through an advisor. If we can lower the cost of advice, we’ll do that. We don’t have a revenue model for it yet [or additional details], but we’re building it so it can be used outside the walls of Vanguard.
What’s the internal debate at Vanguard on mutual fund versus ETF fees?
Buckley: Both are rock bottom prices, but we had the debate to say ETFs is where most of the growth has been, and it’s a lower-cost vehicle for us to run. So, we try to reflect that. If it’s lower cost to run, then we should offer it at a lower price. But whether you’re using the fund or the ETF, they’re both very low cost.
When we talk to people, the conversation is more about when you would use the ETF versus the mutual fund. When you’re in an advice program, the ETF may be more advantageous for things like tax loss harvesting. For a lot of fee-based platforms, the ETF is better. It really depends on what your platform is.
Thoughts on nontransparent ETFs and direct indexing?
Buckley: First, on active ETFs, if you took at traditional active fund and put it in an ETF, you have one big problem: You can’t close an ETF. The thing with active management is that alpha is scarce. If you’re a great portfolio manager, you eventually may say, “I’m at capacity.” And if you have an active ETF as your strategy, what do you do? You can’t close it. Whenever we roll out an ETF, we first make sure we have plenty of capacity for that strategy.
We’ve had many debates, for example, in muni ETFs on whether there’s enough capacity in that market, let alone in an active one. I worry about that on ETFs. On direct indexing, that’s a technology to watch, and is there a trend there? It has to be low cost.
The power of mutual funds is you’re pulling assets together and you’re getting scale and really low pricing. Now you have to have the technology to bring the assets together, trade in similar price; do people want the customization that would bring? Maybe they do, maybe they don’t. These are things you don’t dismiss, but is it a better answer?
What’s driving Vanguard’s growth?
Buckley: If you look at our growth over the last 10 years, two-thirds of our growth has come from two spots: target date funds and ETFs. We’ve been able to ride two trends of disruption: ETFs in the advisor space; and target -date funds in the 401(k) retirement plans.
