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From CEO to Startups: Masters in Business with Former Vanguard CEO Bill McNabb · Masters in Business

• 0:02
  Speaker 1: Bloomberg audio studios, podcasts, radio news.
• 0:10
  Speaker 2: This is masters in business with Barry Ritholtz on Bloomberg radio.
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  Speaker 2: This week on the podcast, another extra extra special guest,
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  Speaker 2: Bill McNabb was CEO and chairman at the Vanguard group. Uh,
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  Speaker 2: he had been with the firm for 30 years, helping
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  Speaker 2: to take them, uh, up to trillions of dollars. We've
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  Speaker 2: spoken to him a couple of times in the past.
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  Speaker 2: He discusses his post-Vanguard career, the boards he's sitting on,
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  Speaker 2: all the fintech startups and venture capital he's working with.
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  Speaker 2: I thought this conversation was fascinating, and I think you
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  Speaker 2: will also. With no further ado, my sit-down with William McNabb.
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  Speaker 2: Bill McNabb, welcome back to Bloomberg.
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  Speaker 3: Thanks, Barry. It's great to be here.
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  Speaker 2: So the last two times you were here, you were
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  Speaker 2: running Vanguard Group. I'm curious, how does a guy who
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  Speaker 2: rode at Dartmouth, taught Latin, and coached at the Haverford
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  Speaker 2: School end up running the world's largest mutual fund company?
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  Speaker 3: So there's an old saying that it's better to be
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  Speaker 3: lucky than smart.
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  Speaker 2: And- My mom used to say that to me all
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  Speaker 2: the time.
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  Speaker 3: And that really did apply. I got very lucky, Barry,
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  Speaker 3: in terms of just opportunities that happened to come across,
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  Speaker 3: come my way. And I had incredible mentors who sort
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  Speaker 3: of helped take those opportunities and make more of them
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  Speaker 3: than maybe they would have been otherwise. And one thing
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  Speaker 3: led to another.
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  Speaker 1: Huh.
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  Speaker 2: Really interesting. So teaching Latin and coaching, what does that
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  Speaker 2: teach somebody like you about leadership that you were able
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  Speaker 2: to apply across three decades at Vanguard?
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  Speaker 1: Yeah.
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  Speaker 3: I think that the two big things, and I was
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  Speaker 3: very fortunate to work for somebody at Vanguard who really
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  Speaker 3: lived this, and I'll come back to that in a second,
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  Speaker 3: but the power of we versus I. I was coaching
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  Speaker 3: a rowing team, and no matter how good the individual
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  Speaker 3: athletes were, if they didn't really exist in order to
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  Speaker 3: make the boat go faster, you weren't going to win.
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  Speaker 3: And we had to really get that across to people.
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  Speaker 3: And that collective drive for success actually is incredibly applicable
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  Speaker 3: in the business world. I think the other thing, maybe
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  Speaker 3: a little more subtle, is you lead by example. And
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  Speaker 3: some of the people who talk about it and they
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  Speaker 3: theorize and all these fancy sayings, I'd rather just watch
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  Speaker 3: somebody do what they do really well. And if they're
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  Speaker 3: building good teams, just that example of how they do
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  Speaker 3: it is really worth emulating. I work for Jack Brennan,
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  Speaker 3: as you know, and you've had Jack on here before
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  Speaker 3: as well. And Jack really lived that. For me, when
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  Speaker 3: I got to Vanguard, the we versus I was very
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  Speaker 3: apparent where he was driving the firm. And then no
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  Speaker 3: one led by example better than Jack. And when you've
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  Speaker 3: grown up in that world as a coach and an athlete,
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  Speaker 3: and then you get it reinforced professionally early in your career,
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  Speaker 3: it becomes a way of thinking.
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  Speaker 2: Yeah, big fan of Jack Brennan. Loved what he did.
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  Speaker 2: When you joined Vanguard in 86, it was obviously a
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  Speaker 2: fraction of where it was today. It was far less
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  Speaker 2: than a trillion dollars. And even in the mid-80s, I mean,
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  Speaker 2: that was the beginning of the bull market that started
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  Speaker 2: in 82.
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  Speaker 3: Yeah.
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  Speaker 2: You had Peter Lynch and the Fidelity Magellan Fund. Berkshire
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  Speaker 2: Hathaway was on the rise. Stock picking was on the rise.
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  Speaker 2: I guess I could say indexing was a fringe idea.
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  Speaker 2: What did the firm look like back in the mid-' 80s?
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  Speaker 2: Did you have any idea what was coming your way
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  Speaker 2: over the next couple of decades?
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  Speaker 3: This is why I said it's really better to be
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  Speaker 3: lucky than smart. I did not see this incredible explosion coming.
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  Speaker 3: What attracted me to Vanguard was I was working here
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  Speaker 3: for what's now JPMorgan Chase in New York and was
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  Speaker 3: getting a little frustrated with a lot of things and
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  Speaker 3: decided it was probably time to go. And one of
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  Speaker 3: my really, again, one of my mentors said to me,
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  Speaker 3: go find a place where the values match your own.
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  Speaker 3: And when I went in and interviewed with Jack Brennan
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  Speaker 3: and then Jack Bogle, I found, it was like, wow,
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  Speaker 3: this is so different. And there was tremendous appeal And
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  Speaker 3: so I did it really based on gut and intuition.
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  Speaker 3: At the time, and so when I interviewed with Jack Bogle,
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  Speaker 3: the funny story was he had data, pulled out a
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  Speaker 3: bunch of stuff, and he's like, we just crossed $ 15
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  Speaker 3: billion under management, and I have no idea how we're
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  Speaker 3: going to get to 20. So I don't know why
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  Speaker 3: you would come here. You're doing big things on Wall Street.
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  Speaker 3: And I didn't even really have a response. And then
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  Speaker 3: he went on and he goes, but of course. And
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  Speaker 3: for the next hour and a half, I got a
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  Speaker 3: lecture about everything that needed to change in the asset
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  Speaker 3: management business. I go home and my wife says to me,
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  Speaker 3: how'd it go? I said, I don't know. I didn't
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  Speaker 3: say anything. But she goes, well, what are you going
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  Speaker 3: to do? And I said, well, if he offers me
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  Speaker 3: the job, I'm going. Because there's just something like there
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  Speaker 3: was the passion and the drive and the really contrarian view.
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  Speaker 3: So the early days, look, we paid as much attention
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  Speaker 3: to active management as Fidelity did. So Fidelity had Peter
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  Speaker 3: Lynch and Magellan Fund. We had John Neff and the
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  Speaker 3: Windsor Fund.
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  Speaker 1: Sure.
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  Speaker 3: Arguably one of the two or three greatest value investors
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  Speaker 3: in history. And Jack himself was making sure that we
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  Speaker 3: were competitive. Money market funds were just taking off. And
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  Speaker 3: we got into the money market fund wars. So people will-
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  Speaker 3: And it's hard for people to imagine today, but yields
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  Speaker 3: were in 17%, 18% at different times. And Dreyfus, Fidelity,
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  Speaker 3: and Vanguard were the three money market fund giants. We
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  Speaker 3: each had a couple billion dollars. But everybody was comparing yields.
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  Speaker 3: And so active management and the yield on the money
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  Speaker 3: market fund in the early days, those were like the
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  Speaker 3: big drivers.
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  Speaker 2: So my pet thesis. So to put this into context,
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  Speaker 2: $ 15 billion in the early 80s. just about 15 trillion today.
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  Speaker 2: That's just a crazy, crazy thousand-fold increase, 10,000-fold increase. That's
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  Speaker 2: just an insane run. My theory is the late 90s,
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  Speaker 2: the scandals, the crashes, the analyst scandal, the accounting scandal,
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  Speaker 2: the IPO scandal, one after another. I think a lot
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  Speaker 2: of people just threw their hands up and said, you
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  Speaker 2: know what? Just buy me the whole market. Let me
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  Speaker 2: know when it's time to retire. Let me know when
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  Speaker 2: I have enough to retire. Is that oversimplifying what happened
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  Speaker 2: or is that a real effect?
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  Speaker 3: I would say that's the psychological part of it. There
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  Speaker 3: was also the math part of it, which is on
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  Speaker 3: an after-tax basis, index funds beat 90% of active equities
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  Speaker 3: over any rolling 10-year period.
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  Speaker 2: Anything more than a decade.
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  Speaker 3: Anything more than a decade. So if you were a
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  Speaker 3: long-term investor and you wanted to win, you indexed. And
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  Speaker 3: so it was interesting to me as a participant in
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  Speaker 3: the market I've listened to our competitors and they talk, well,
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  Speaker 3: you know, indexing is having its moment, but it's going
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  Speaker 3: to cycle out and, you know, stock will be back
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  Speaker 3: any day. And the math was just overwhelming that when you,
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  Speaker 3: and the real reason, and this was Jack Bogle's, again,
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  Speaker 3: oversimplified discussion, but essentially if you have two big parts
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  Speaker 3: of the market, one that's actively managed and one that's
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  Speaker 3: passively managed, they have to add up to the market.
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  Speaker 2: That's right.
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  Speaker 3: So the average on the, active side is going to
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  Speaker 3: be the market because you know the index side is
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  Speaker 3: going to be the market. And then you take costs
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  Speaker 3: into account. All of a sudden, you've got arithmetic working
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  Speaker 3: in your favor. So for us, there was this, it's simple,
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  Speaker 3: it's easy, it's low cost, and it works. And I
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  Speaker 3: think that was such a powerful thing. And our shareholders, Barry,
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  Speaker 3: as you know, because you've been a student of the
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  Speaker 3: game for so long, they stayed with us way longer
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  Speaker 3: than other investors stayed with their firms. On average, I
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  Speaker 3: think it was 3x. So the average duration of a
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  Speaker 3: relationship was 3x that of the industry. That's an incredible
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  Speaker 3: advantage in terms of just how you think about your business.
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  Speaker 2: So you become CEO in August 08. Two weeks later,
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  Speaker 2: Lehman Brothers goes kaput. Remind us what was happening in
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  Speaker 2: that era. What was that transition like? Like stepping into
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  Speaker 2: the lead role just as it looks like the world
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  Speaker 2: is going to hell. And what was that experience like?
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  Speaker 3: Yeah. So, look, you know, in the darkest days, I mean,
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  Speaker 3: everyone was questioning whether the system would survive. So different
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  Speaker 3: than other crises we've seen. People really looked at, like,
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  Speaker 3: will the market actually survive this? And we had a
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  Speaker 3: deep-seated belief it would. And so we, we, we kind
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  Speaker 3: of had this bifurcated way of looking at the world,
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  Speaker 3: like each and every day, what were we doing to,
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  Speaker 3: to better assure our investors that somewhere down the road,
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  Speaker 3: things would get better and they had to stay the course.
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  Speaker 3: Like the worst thing you could do was to panic
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  Speaker 3: unless you really believe the world was going to end.
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  Speaker 3: And we had to do, so we met twice a day,
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  Speaker 3: every morning and every afternoon. And we went through, transaction
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  Speaker 3: by transaction, fund performance, everything you needed to try to
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  Speaker 3: assure our investors. At the same time, we knew that
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  Speaker 3: the world was going to be different. Regulation was going
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  Speaker 3: to be different. The competitive landscape was going to change.
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  Speaker 3: And maybe even some of the business models were going
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  Speaker 3: to change. And so we started laying the groundwork for
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  Speaker 3: all those changes. And just to give you a couple
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  Speaker 3: of tangible examples, the role of advisors. So at that
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  Speaker 3: point in time, the independent advisor channel, which, again, you've
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  Speaker 3: lived this, was a really tiny fraction of advisors. Most
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  Speaker 3: of it was the big brokerage firms. And they were
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  Speaker 3: primarily commission-driven.
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  Speaker 2: Right, all transaction-based.
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  Speaker 3: All transaction-based, and essentially conflicted. Because the more you trade,
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  Speaker 3: the more money they make. The more you trade, the
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  Speaker 3: more you lose. from a performance standpoint. So we believe
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  Speaker 3: that this would accelerate the move to asset-based fees and
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  Speaker 3: that it would be a very different model. The other
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  Speaker 3: one for us, we really thought this would accelerate indexing
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  Speaker 3: for all the reasons that you cited earlier in terms
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  Speaker 3: of just, hey, it's safe. It's just by the market.
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  Speaker 3: And again, the math was overwhelming. Even during a downturn,
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  Speaker 3: Stock pickers did not outperform the index.
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  Speaker 2: Which is the claim before, just wait until the next
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  Speaker 2: downturn and you'll see how well stock pickers have done.
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  Speaker 3: So we started to make moves around those changes. We
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  Speaker 3: knew the regulations were going to change a lot. And
• 11:33
  Speaker 3: we also knew the competitive landscape. And frankly, we didn't
• 11:35
  Speaker 3: get that all right. We knew somebody would end up
• 11:40
  Speaker 3: with iShares because Barclays Bank was under such duress.
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  Speaker 2: Mm-hmm.
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  Speaker 3: I didn't see BlackRock doing it. I just didn't anticipate that.
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  Speaker 2: What a great buy for them.
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  Speaker 3: It was phenomenal. I mean, one of the stories we
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  Speaker 3: don't talk much about, we actually were a serious bidder
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  Speaker 3: on it until the regulators came in and changed the game,
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  Speaker 3: and then we had to back away.
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  Speaker 2: Really? How come BlackRock would be allowed and Vanguard wouldn't?
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  Speaker 3: We were allowed, but they wanted to pair their institutional
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  Speaker 3: business with the iShares franchise. We didn't want anything to
• 12:17
  Speaker 3: do with that institutional business because we were all mutual
• 12:20
  Speaker 3: fund retail based. And again, all the credit in the
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  Speaker 3: world to Larry Fink and his team and BlackRock and
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  Speaker 3: what they did. But it was interesting. I had a
• 12:31
  Speaker 3: director come to me after all this. And he says,
• 12:34
  Speaker 3: so you're six months in the job. You come to
• 12:37
  Speaker 3: us about doing our first acquisition ever. It's a very
• 12:40
  Speaker 3: large check. And over a beer sometime, I can tell
• 12:44
  Speaker 3: you about all the nuances that went on.
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  Speaker 2: I'm looking forward to it.
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  Speaker 3: It was pretty cool. Yeah. So what's that tell you
• 12:50
  Speaker 3: about ETFs and this advisor channel? And we took that back.
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  Speaker 3: And that's when we really went all in on ETFs
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  Speaker 3: and all in on really serving advisors better. And that
• 13:01
  Speaker 3: was a huge change then.
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  Speaker 2: I want to circle back to advice and target date
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  Speaker 2: funds and just stay with 08-09 for another moment. The
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  Speaker 2: first time you were on, you told a story about
• 13:16
  Speaker 2: how you had figured out how nervous... your employees were.
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  Speaker 2: And do you recall what I'm talking about? Remind us
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  Speaker 2: of what that environment was, how it was affecting clients, staff,
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  Speaker 2: and what your solution to it was.
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  Speaker 3: So, you know, all of our competitors were laying people
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  Speaker 3: off left and right because transaction volumes had just gone away.
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  Speaker 2: Other than selling.
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  Speaker 3: Other than selling. And, you know, if you're The classic
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  Speaker 3: mutual fund company in those days was probably 65%, 70% equity.
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  Speaker 3: And the equity market peak to trough was down 50%.
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  Speaker 3: So your revenue was down 35%. I think it was 57%, 56%,
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  Speaker 3: something like that. March 9th, I think.
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  Speaker 2: Yeah, that's exactly right.
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  Speaker 3: It was identical to 73%, 74% in terms of the drawdown.
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  Speaker 1: Yeah.
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  Speaker 3: Our people were incredibly nervous. I mean, people were wondering,
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  Speaker 3: so we went to our people and we got our
• 14:14
  Speaker 3: board's blessing to do this and said, there will be
• 14:18
  Speaker 3: no redundancies, no layoffs. All we want you to do
• 14:22
  Speaker 3: is be flexible and we may need you to move
• 14:25
  Speaker 3: from one role to another, wherever the client demand is
• 14:28
  Speaker 3: and whatever the need is. So we ended up, um,
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  Speaker 3: doubling down on service and doubling down on fixing problems that,
• 14:37
  Speaker 3: you know, we had service, you know, everybody has service issues.
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  Speaker 3: We took, if we had excess people, we turned them
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  Speaker 3: loose on those problems. And the theory was you couldn't
• 14:46
  Speaker 3: cut your way out of this. And if you had
• 14:50
  Speaker 3: people nervous about their own jobs, how are they going
• 14:52
  Speaker 3: to reassure clients about the world's not ending? And they
• 14:57
  Speaker 3: were going to feel conflicted. And I think it really
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  Speaker 3: worked because.
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  Speaker 2: Um, Everybody exhaled.
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  Speaker 3: Everybody exhaled. Took a deep breath. And we went all
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  Speaker 3: in on educating our clients. And our service levels were incredible.
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  Speaker 3: We got a lot of positive reinforcement back from the clients.
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  Speaker 3: So I think strategically, it was one of the most
• 15:21
  Speaker 3: important things we did during that period.
• 15:24
  Speaker 2: And then out of the depths of the financial crisis,
• 15:27
  Speaker 2: you guys leaned hard into the advisor channel into building
• 15:32
  Speaker 2: your own advisor space, and then target date funds, which
• 15:37
  Speaker 2: I believe came out of an off-site meeting around the crisis.
• 15:40
  Speaker 2: Tell us a little bit about that redirection expansion and
• 15:45
  Speaker 2: the new post-crisis direction for Vanguard.
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  Speaker 3: So it really was, you know, we did this very
• 15:53
  Speaker 3: existential exercise with Jim Collins, the great business writer. Mm-hmm.
• 15:58
  Speaker 2: Good to Great, is that right?
• 16:00
  Speaker 3: Good to Great. The two books that were really influential
• 16:03
  Speaker 3: on our thinking were Built to Last, How Do You
• 16:05
  Speaker 3: Build a Company That Can Be a Leading Company for
• 16:08
  Speaker 3: 100 Years, and then Good to Great. And so we
• 16:13
  Speaker 3: asked ourselves, in order to be great, we thought the
• 16:18
  Speaker 3: first step was, what's our why? Why do we exist?
• 16:22
  Speaker 3: And we had a mission statement, and it was very
• 16:24
  Speaker 3: long and a lot of adjectives and adverbs. And we
• 16:28
  Speaker 3: took a team and we mixed the team. It was
• 16:31
  Speaker 3: a couple of senior people, but all the way down
• 16:33
  Speaker 3: to the front lines. And we said, come back with
• 16:36
  Speaker 3: why do we exist? Why do we have a right
• 16:37
  Speaker 3: to exist? And it was really simple. It was take
• 16:39
  Speaker 3: a stand for investors, treat them fairly, and give them
• 16:42
  Speaker 3: the best chance for investment success. And that latter one
• 16:46
  Speaker 3: in particular, target date funds, you do the math. We
• 16:52
  Speaker 3: could demonstrably show that investors who went in target date
• 16:55
  Speaker 3: funds did better than those who didn't. doing our own
• 16:59
  Speaker 3: advice program, low cost advice. That's, you know, tax sensitive,
• 17:04
  Speaker 3: really focused on asset allocation and very disciplined and rebalancing
• 17:09
  Speaker 3: and not letting people, you know, in a sense, harm
• 17:12
  Speaker 3: themselves that, you know, that that's where advisors add tremendous value. So,
• 17:19
  Speaker 3: you know, build a bill, you know, build that. So
• 17:21
  Speaker 3: these things, Barry were, they, they were in a sense,
• 17:25
  Speaker 3: logical outcomes target and, you know, The target date thing
• 17:29
  Speaker 3: was interesting. We had people arguing about, well, it doesn't
• 17:32
  Speaker 3: really take risk into account, just setting a date. And
• 17:36
  Speaker 3: we're like, every risk quiz I've ever seen gets the
• 17:40
  Speaker 3: same answer, moderate.
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  Speaker 2: My experience has been when you do the risk tolerance
• 17:46
  Speaker 2: surveys with investors, what you really find out is what's
• 17:50
  Speaker 2: been going on in the market for the past six months.
• 17:52
  Speaker 2: So if it's doing great, they're much less risk averse.
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  Speaker 2: And when it's in the crapper, suddenly, no, I'm not
• 17:59
  Speaker 2: an adventurous investor. I'm a low-risk investor.
• 18:02
  Speaker 3: So when we really looked at the math, those quizzes
• 18:04
  Speaker 3: were adding no value in terms of the asset allocation
• 18:07
  Speaker 3: decisions we were making. So we were like, just take
• 18:09
  Speaker 3: it out. Make it simple. Tell us when you're going
• 18:11
  Speaker 3: to retire, and that's the fund we're going to put
• 18:14
  Speaker 3: you in. And again, you track all this. The fund
• 18:17
  Speaker 3: performance of those funds versus unmanaged accounts in 401k, it's superior.
• 18:22
  Speaker 2: There's a reason that has become the default- holding in
• 18:28
  Speaker 2: 401ks because before that richard thaler driven behavioral change was
• 18:33
  Speaker 2: made people would just leave money in cash and when
• 18:37
  Speaker 2: the market would run.
• 18:37
  Speaker 3: Guaranteed investment contracts and money market funds were the default
• 18:40
  Speaker 3: options of choice and i started out as guaranteed investment
• 18:44
  Speaker 3: contract product manager at vanguard so like i knew this
• 18:46
  Speaker 3: world really well um We had, and it's funny you
• 18:50
  Speaker 3: mentioned Thaler, so Shlomo Bernarsi and Dick Thaler did all
• 18:55
  Speaker 3: of the seminal work on applying behavioral finance to 401k plans.
• 18:59
  Speaker 3: We sponsored a lot of their research.
• 19:01
  Speaker 1: Oh, really?
• 19:01
  Speaker 3: And we actually worked with them, and it really helped
• 19:04
  Speaker 3: us think about. automatic enrollment into 401k plans, automatic escalation
• 19:09
  Speaker 3: of your contribution.
• 19:10
  Speaker 2: As your salary increases.
• 19:11
  Speaker 3: As your salary increases. And then the default option being
• 19:14
  Speaker 3: a target date fund.
• 19:16
  Speaker 2: The more you can automate a process, the less opportunity
• 19:19
  Speaker 2: there is for human bad decision making and poor intervention.
• 19:25
  Speaker 2: So last two Vanguard questions before we move on. So
• 19:29
  Speaker 2: Jack Bogle was at Vanguard pretty much your entire tenure
• 19:34
  Speaker 2: as What was your relationship like with him? I know
• 19:38
  Speaker 2: he wasn't necessarily a big fan of things like ETFs
• 19:41
  Speaker 2: or overseas investing. Tell us a little bit about what
• 19:45
  Speaker 2: it was like to work with Jack for 30 years.
• 19:48
  Speaker 3: You know, Jack I chuckle because I learned so much.
• 19:55
  Speaker 3: One of my early roles was my second role at Vanguard.
• 19:58
  Speaker 3: I sort of fell into running product development, which was
• 20:03
  Speaker 3: really whatever Jack thought up for as a new investment product,
• 20:09
  Speaker 3: you went and did the homework and then, you know, um,
• 20:13
  Speaker 3: went and executed. Uh, so I got to work with
• 20:15
  Speaker 3: him a lot in those early days. He was incredibly demanding, um,
• 20:19
  Speaker 3: very fair, but incredibly demanding. Um, and I, you know,
• 20:22
  Speaker 3: I had my share of, you know, do I need
• 20:25
  Speaker 3: to get my resume in order? Cause he had been,
• 20:27
  Speaker 3: you know, a lot of pen marks on a paper
• 20:29
  Speaker 3: or whatever. But, um, when I became a CEO, um,
• 20:35
  Speaker 3: you know, I got a nice note from him right away.
• 20:38
  Speaker 3: And then a few months later, I got like a
• 20:40
  Speaker 3: 20 page, like series of things we should be thinking about. And,
• 20:46
  Speaker 3: you know, I'd say all well thought out about half
• 20:49
  Speaker 3: of which I said, nah, that's, we're going to do
• 20:52
  Speaker 3: something different. But, um, you know, he wasn't, he certainly
• 20:57
  Speaker 3: was not shy. And so, um, You're right. ETFs, global funds,
• 21:04
  Speaker 3: international investing in general was not a huge fan. However,
• 21:09
  Speaker 3: I had a couple of great people on my staff
• 21:15
  Speaker 3: who just constantly went to see him and talk to
• 21:18
  Speaker 3: him and really take his wisdom seriously. And in the end,
• 21:23
  Speaker 3: if you watch some of his last interviews on ETS,
• 21:25
  Speaker 3: he'd say, unless you do it like Vanguard does it like,
• 21:28
  Speaker 3: you know, and, and he, he slowly moved there. Um,
• 21:33
  Speaker 3: I think the other thing, um, you know, so international, he, he,
• 21:41
  Speaker 3: the team in Australia, which is our, was our biggest
• 21:45
  Speaker 3: international presence when I retired. I think it still is. Um,
• 21:48
  Speaker 3: Jack made a visit there after he'd retired, but he
• 21:53
  Speaker 3: was still running the Bogle Research Center. And it was epic.
• 21:57
  Speaker 2: Oh, really?
• 21:58
  Speaker 3: They talk about it still to this day, about how
• 22:01
  Speaker 3: impactful it was to have the founder there. And he
• 22:04
  Speaker 3: was so proud that the message was going beyond our borders.
• 22:09
  Speaker 3: And so, again, there was.
• 22:12
  Speaker 2: Still no real traction in Europe starting to lean that way.
• 22:17
  Speaker 2: They have just such a different- I don't know if
• 22:19
  Speaker 2: it's the fact that their retirements are more or less covered.
• 22:25
  Speaker 3: State-driven. And the banks control everything there for the most part.
• 22:29
  Speaker 3: Although in the UK, we've had a lot of success
• 22:32
  Speaker 3: in the UK.
• 22:32
  Speaker 2: It's shifting there before everywhere else. So last Vanguard question.
• 22:37
  Speaker 2: I recall just at the tail end of the financial crisis,
• 22:43
  Speaker 2: you guys crossed a trillion dollars, then $ 2 trillion. By
• 22:47
  Speaker 2: the time you retire- I don't know if it was
• 22:50
  Speaker 2: four or five trillion dollars.
• 22:51
  Speaker 3: It's a little over five.
• 22:52
  Speaker 2: Five trillion dollars. My question for you was your first
• 22:56
  Speaker 2: day of retirement, what was it like waking up saying,
• 23:00
  Speaker 2: I'm not responsible for thousands, millions of investors and trillions
• 23:04
  Speaker 2: of dollars? You know, it was mixed emotion, Barry.
• 23:09
  Speaker 3: Mm-hmm. You know, so much of my career was spent
• 23:12
  Speaker 3: in front of clients. You know, I helped build our
• 23:15
  Speaker 3: 401k business in the early days. So I got out
• 23:17
  Speaker 3: to see employee groups on behalf of the plan sponsors.
• 23:22
  Speaker 3: So I probably had more interaction than anyone had ever
• 23:27
  Speaker 3: had with direct. I missed that a lot. Those, I mean,
• 23:32
  Speaker 3: I just had so many incredible experiences and relationships and
• 23:35
  Speaker 3: I missed our people. You know, one of the great
• 23:38
  Speaker 3: things in this, you know, both Jack Bogle and Jack
• 23:41
  Speaker 3: Brennan were so good at, they did not like hierarchy
• 23:46
  Speaker 3: and they didn't like this idea that, you know, we
• 23:49
  Speaker 3: didn't have executive dining rooms and, you know, special parking
• 23:52
  Speaker 3: places and all that kind of stuff because we believed
• 23:56
  Speaker 3: everybody's job was really important. And, you know, we all
• 24:00
  Speaker 3: used to love to walk the floors and, you know,
• 24:02
  Speaker 3: see what people were up to and talk to them.
• 24:04
  Speaker 3: So I miss that and I miss the clients, but,
• 24:08
  Speaker 3: you know, you, At the same time, the team that
• 24:12
  Speaker 3: was there, I'd worked with most of them for 25 years.
• 24:16
  Speaker 3: I felt good about that team. And it was like,
• 24:19
  Speaker 3: go knock it out of the park.
• 24:20
  Speaker 2: You left the place in good shape. Coming up, we
• 24:23
  Speaker 2: continue our conversation with Bill McNabb, former CEO and chairman
• 24:28
  Speaker 2: of the Vanguard Group, talking about his new roles in
• 24:32
  Speaker 2: the boardroom and working with startups. I'm Barry Ritholtz. You're
• 24:36
  Speaker 2: listening to Masters in Business on Bloomberg Radio. I'm Barry Ritholtz.
• 24:49
  Speaker 2: You're listening to Masters in Business on Bloomberg Radio. My
• 24:53
  Speaker 2: extra special guest this week is Bill McNabb. He is
• 24:57
  Speaker 2: the former CEO and chairman of Vanguard. The firm now runs,
• 25:02
  Speaker 2: I don't know, is it $ 14 trillion? Some wild number.
• 25:06
  Speaker 2: So You stepped down as CEO at 60 with the
• 25:10
  Speaker 2: firm pretty much running on all cylinders, doing great, great team.
• 25:16
  Speaker 2: As someone who just went through the process of succession planning,
• 25:20
  Speaker 2: I have to ask you, how did you know it
• 25:22
  Speaker 2: was time to step down? How do you think about
• 25:26
  Speaker 2: doing succession correctly? There are so many examples of firms
• 25:30
  Speaker 2: that get it wrong.
• 25:32
  Speaker 3: So, you know, one of the things about, again... I
• 25:36
  Speaker 3: had a great mentor on this. My predecessor, Jack Brennan,
• 25:39
  Speaker 3: you know, Jack retired when he was, I think, 54.
• 25:44
  Speaker 2: But he stayed as chairman for a few years, right?
• 25:46
  Speaker 3: Just a year. Okay. But he had run the firm
• 25:49
  Speaker 3: for 12 years. And I couldn't believe it when he
• 25:54
  Speaker 3: told me he was going to do this and I
• 25:56
  Speaker 3: was going to succeed him. And I asked him why.
• 25:58
  Speaker 3: And he said, look, he goes somewhere in that 10
• 26:00
  Speaker 3: to 12 year range. If you've done a decent job,
• 26:04
  Speaker 3: people stop pushing you and they stop questioning you because
• 26:07
  Speaker 3: you've been right more than you've been wrong. And he goes,
• 26:09
  Speaker 3: that's not healthy. And the ability to reinvent the firm
• 26:13
  Speaker 3: or to really push for innovation gets harder because you
• 26:16
  Speaker 3: really need a collective wisdom to do that. And that's
• 26:22
  Speaker 3: where the art is, Barry. But I felt like the
• 26:24
  Speaker 3: team was really strong. I was seeing signs. We'd had
• 26:28
  Speaker 3: a lot of success. So I was seeing some of
• 26:30
  Speaker 3: those signs. And it was, OK, time to let a
• 26:33
  Speaker 3: new generation see what they can do and, you know,
• 26:37
  Speaker 3: leave the place in a good spot and then go.
• 26:40
  Speaker 2: Did you set up like a detailed plan as to
• 26:44
  Speaker 2: your retirement or was it just evolving organically?
• 26:48
  Speaker 3: So at a detailed plan as to how, you know,
• 26:51
  Speaker 3: how we were going to do the transition at Vanguard.
• 26:52
  Speaker 3: And we worked really closely with our board on that. And,
• 26:56
  Speaker 3: you know, there were steps. In terms of my own thing,
• 26:59
  Speaker 3: I was like, I didn't want to think about it.
• 27:02
  Speaker 3: I thought, I'd wait until I was out. I had
• 27:06
  Speaker 3: a year where I was board chair still. And I'd
• 27:10
  Speaker 3: originally said I would do that for as long as
• 27:12
  Speaker 3: three years. But after a year, it became clear the
• 27:15
  Speaker 3: firm's really doing great. There's no need for this. But
• 27:18
  Speaker 3: that year, I did a ton of travel for us
• 27:21
  Speaker 3: all around the world, seeing clients, regulators, whomever. And I
• 27:27
  Speaker 3: also did a lot down in DC because there was
• 27:31
  Speaker 3: a lot of regulatory stuff going on. And so I
• 27:34
  Speaker 3: had a lot of travel time. So that's when I
• 27:36
  Speaker 3: started to think about, okay, what am I going to
• 27:39
  Speaker 3: do at this next phase? And I described this phase
• 27:44
  Speaker 3: as sort of the, there's like three parts to it.
• 27:47
  Speaker 3: There's family and fun, there's governance, and then there's, I'll
• 27:55
  Speaker 3: call it, I call it pay it forward, but mentoring and,
• 27:59
  Speaker 3: you know, helping develop a new cadre of leaders and
• 28:02
  Speaker 3: so forth. And, you know, I've been pretty, I won't
• 28:06
  Speaker 3: say systematic, but I've tried to be careful. I've probably
• 28:08
  Speaker 3: overcommitted it a couple times in different things. But, you know,
• 28:11
  Speaker 3: you try to feel your way through that. And the
• 28:14
  Speaker 3: family and fun stuff are the passion things. The governance
• 28:18
  Speaker 3: for me, you know, I had an opportunity to co-write
• 28:23
  Speaker 3: a book on governance with uh, Ram Charan. And, you know, we,
• 28:30
  Speaker 3: we did the, we did the book and we talked
• 28:33
  Speaker 3: to everybody. Like it was, it was so much fun,
• 28:35
  Speaker 3: you know, talking to Warren Buffett about, you know, how's
• 28:37
  Speaker 3: he think about governance? Um, just incredible. And, uh, Dennis
• 28:42
  Speaker 3: Carey was the third co-author by the way. And we,
• 28:45
  Speaker 3: so I did that and that, that led to, you know,
• 28:49
  Speaker 3: leading the, uh, co-leading the, uh, NACD's blue ribbon commission
• 28:53
  Speaker 3: on the future of the American boardroom. And I do
• 28:56
  Speaker 3: work with CECP, which is CEOs for Corporate Purpose, Daryl
• 29:01
  Speaker 3: Brewster's organization, which does incredible work on governance as well.
• 29:04
  Speaker 3: So I had this whole sort of academic thing around
• 29:08
  Speaker 3: governance going on and then got the opportunity to serve
• 29:13
  Speaker 3: on two very large public boards where you're on the
• 29:17
  Speaker 3: other side.
• 29:19
  Speaker 2: So let's talk about those boards. IBM and UnitedHealth Group,
• 29:23
  Speaker 2: two giant companies- So different and each going through very
• 29:27
  Speaker 2: different transformations. How do you shift from being a CEO
• 29:33
  Speaker 2: to being a director? And what can a board actually
• 29:37
  Speaker 2: accomplish other than just responding? to crises as they come along?
• 29:43
  Speaker 3: You know, I think, I think the board, I think
• 29:47
  Speaker 3: there's sort of three broad categories that the board has
• 29:51
  Speaker 3: to lean in on. You know, the hardest thing being
• 29:54
  Speaker 3: an ex-CEO is you're used to like running things and you,
• 29:58
  Speaker 3: you can't do that. Like, There's a line between management
• 30:02
  Speaker 3: and governance for a reason. And so you try to
• 30:08
  Speaker 3: be very aware of that. But I think where you
• 30:10
  Speaker 3: can lean in is if you think about at the
• 30:15
  Speaker 3: highest level what you're doing is you're allocating capital. And
• 30:20
  Speaker 3: you're allocating financial capital and human capital. So for us,
• 30:25
  Speaker 3: the way we phrased it, and we did this in
• 30:27
  Speaker 3: our book, by the way, we said, look, focus on talent.
• 30:30
  Speaker 3: focus on strategy, focus on risk. And from a governance standpoint,
• 30:37
  Speaker 3: it all sort of boils up to those three things.
• 30:40
  Speaker 3: And how do you help the company think through talent
• 30:44
  Speaker 3: and culture? Do you have the right people to execute
• 30:49
  Speaker 3: the strategy? Most boards want to go right to strategy.
• 30:52
  Speaker 3: But I think you've got to really help the the
• 30:56
  Speaker 3: CEO and the C-suite team think about that culture and
• 30:59
  Speaker 3: think about talent. The best companies do this really well.
• 31:05
  Speaker 3: Strategy has really evolved. It used to be, I can
• 31:12
  Speaker 3: remember doing this with the Vanguard board early in my career.
• 31:15
  Speaker 3: You do a strategic plan, a five-year plan, and it
• 31:20
  Speaker 3: was all written down. Okay, this is what we're going
• 31:21
  Speaker 3: to do. I mean, you've got to be so much
• 31:23
  Speaker 3: more agile now.
• 31:25
  Speaker 2: That's the great Mike Tyson quote. Everybody has a strategy
• 31:29
  Speaker 2: until they're punched in the nose. It's got to be
• 31:32
  Speaker 2: applicable to big corporations as well.
• 31:34
  Speaker 3: So, you know, in talking about my Vanguard experience, I
• 31:38
  Speaker 3: got it firsthand in 2008 because we had a plan.
• 31:43
  Speaker 3: And that plan, we just threw it out. And that
• 31:46
  Speaker 3: plan was one of the coolest sets of objectives and
• 31:50
  Speaker 3: things we were going to do different. completely off because
• 31:54
  Speaker 3: the world changed, the world changed. And so I've tried
• 31:57
  Speaker 3: to bring that mentality in the boardroom. And, um, again, um,
• 32:01
  Speaker 3: I'm very lucky that, you know, the two boards I
• 32:03
  Speaker 3: serve on think that way. Um, you know, I think, uh,
• 32:07
  Speaker 3: you know, IBM has gone through a lot of transformation. Um,
• 32:11
  Speaker 3: you know, our current CEO, Arvin, you know, he's really brought, um,
• 32:17
  Speaker 3: a strategic agility into the company. And if you look
• 32:20
  Speaker 3: at the progress the firm has made since he became CEO,
• 32:24
  Speaker 3: it's really very gratifying. Look, we had a big sell-off
• 32:27
  Speaker 3: last week or two, but we'll talk about what's happening
• 32:32
  Speaker 3: in the markets. I think in the long run, what
• 32:35
  Speaker 3: we're doing strategically makes a ton of sense. And again,
• 32:40
  Speaker 3: we're trying to remain very agile.
• 32:42
  Speaker 2: So let's stay with IBM, which has gone through They
• 32:46
  Speaker 2: began as a typewriter company, right? People don't realize how
• 32:49
  Speaker 2: often IBM has one of the few companies that has
• 32:53
  Speaker 2: successfully pivoted time and again to mainframes, to PCs. So
• 33:00
  Speaker 2: now the pivot is to hybrid, cloud, AI, when you
• 33:05
  Speaker 2: think about all the different things they're doing. How do
• 33:09
  Speaker 2: you help oversee this giant business model that's being developed?
• 33:15
  Speaker 2: Rebuild from the ground up.
• 33:17
  Speaker 3: Look, you try to bring what experiences you have and
• 33:21
  Speaker 3: you try to ask really good questions. And our board
• 33:25
  Speaker 3: has got a breadth. I mean, when you look at
• 33:27
  Speaker 3: the breadth in the board, different people bring different perspectives.
• 33:30
  Speaker 3: So I think when I first came on the board,
• 33:34
  Speaker 3: it was the idea was, oh, you're going to bring
• 33:35
  Speaker 3: a shareholder perspective, like just the shareholder voice in the room.
• 33:39
  Speaker 3: And that's true. But I'm also doing all this work
• 33:42
  Speaker 3: now in the venture world. And so I'm living the
• 33:45
  Speaker 3: AI life big time. I'm seeing the pluses and minuses
• 33:49
  Speaker 3: and everything else. So you try to bring some of
• 33:52
  Speaker 3: that experience. We've got other people who are deep, deep,
• 33:58
  Speaker 3: deep in different elements of technology. We've got other people
• 34:01
  Speaker 3: who are really deep in terms of financial services, which
• 34:05
  Speaker 3: is a huge part of our customer base. We've got
• 34:10
  Speaker 3: some people who are, you know, who will push on
• 34:12
  Speaker 3: the science. You know, we have a former president of
• 34:16
  Speaker 3: a major university, but her whole background was computer science.
• 34:21
  Speaker 3: And so when we start talking quantum, like her eyes
• 34:24
  Speaker 3: light up and I mean, she can go toe to
• 34:26
  Speaker 3: toe with, you know, the research team on the quantum stuff.
• 34:30
  Speaker 3: We're never going to know as much as the management
• 34:32
  Speaker 3: team and the people on the ground. But if you
• 34:34
  Speaker 3: can ask the right questions, you know, I think that
• 34:38
  Speaker 3: becomes really important.
• 34:40
  Speaker 2: Let's talk about your other big company board seat, UnitedHealth. Really,
• 34:44
  Speaker 2: I don't know any company that's gone through a rougher
• 34:47
  Speaker 2: stretch due to outside forces. The CEO gets murdered. Then
• 34:52
  Speaker 2: there was the guidance issue. Big leadership change. The former
• 34:56
  Speaker 2: CEO comes back, Steve Helmsley. And now they're in the
• 35:00
  Speaker 2: midst of a turnaround. What is the board's job in
• 35:05
  Speaker 2: an environment where it's just one crisis after another? Nothing
• 35:10
  Speaker 2: that the company has necessarily done. It seems to be
• 35:13
  Speaker 2: almost all random externalities.
• 35:18
  Speaker 3: This is, again, going back to that agility thing. A
• 35:23
  Speaker 3: lot of business writers have talked about the need for
• 35:25
  Speaker 3: management teams to have a more venture, more startup mentality,
• 35:29
  Speaker 3: be quick to pivot. Boards now have to be quicker
• 35:34
  Speaker 3: to pivot. So we've had to pivot. We've had to
• 35:36
  Speaker 3: think about leadership differently. You know, Steve coming back, huge
• 35:39
  Speaker 3: blessing for us that he's ready and able and willing
• 35:42
  Speaker 3: to do that. One of the greatest CEOs of our time,
• 35:47
  Speaker 3: you know, most people don't know his name, but his
• 35:51
  Speaker 3: ability to see around corners and make hard decisions and
• 35:55
  Speaker 3: then go and execute. It's incredible. But, you know, so we,
• 36:01
  Speaker 3: but we, you know, That wasn't in the plan, Barry.
• 36:05
  Speaker 3: We had to adjust pretty quickly. And again, what you
• 36:10
  Speaker 3: try to do is you try to ask the right questions.
• 36:12
  Speaker 3: You try to probe. You try to be supportive where
• 36:16
  Speaker 3: you need to be supportive. And you try to be
• 36:17
  Speaker 3: challenging where you need to be challenging.
• 36:19
  Speaker 2: So it's so fascinating to me that you're on these
• 36:22
  Speaker 2: two giant publicly traded companies' boards. Vanguard is mutual. They
• 36:29
  Speaker 2: have no outside shareholders. All their mutual fund investors are
• 36:34
  Speaker 2: effectively the owners. There's no stock price to worry about.
• 36:39
  Speaker 2: How different is it stepping into this world of public
• 36:42
  Speaker 2: company directors? It seems like such a giant shift.
• 36:49
  Speaker 1: Yeah, it is.
• 36:51
  Speaker 3: And look, I think there are people who, in a
• 36:54
  Speaker 3: lot of ways, are way more qualified than I am.
• 36:56
  Speaker 3: And you try to be as helpful as you can be.
• 37:02
  Speaker 3: I think the one thing that Vanguard actually really trained
• 37:05
  Speaker 3: me well for was to think long-term. And yet at
• 37:08
  Speaker 3: the same time, our performance was measured every day, every week,
• 37:12
  Speaker 3: every month. So we had this ability to do both.
• 37:17
  Speaker 3: And again, Jack Brennan, Jack Bogle really drilled that into us.
• 37:22
  Speaker 3: And I think our team did it exceptionally well. The
• 37:27
  Speaker 3: biggest aha is like, the pressure on the quarter, right? Like,
• 37:31
  Speaker 3: you know, you're, you're giving guidance, you're, you're, you're, you're,
• 37:34
  Speaker 3: you know, really thinking hard about your earnings calls and
• 37:37
  Speaker 3: so forth. That was a new thing for me. Cause again,
• 37:40
  Speaker 3: I never had to do that, but the analogy is,
• 37:47
  Speaker 3: you know, we were very, you know, long-term performance is
• 37:49
  Speaker 3: made up of a lot of short-term performance. So I
• 37:52
  Speaker 3: paid a lot of attention to short-term performance. I didn't
• 37:54
  Speaker 3: obsess over it. I paid a lot of attention to
• 37:56
  Speaker 3: it because it led to, you know, cumulatively it leads
• 37:59
  Speaker 3: to long-term So I've had to bring that same mentality.
• 38:03
  Speaker 3: I've had to learn that here. It's a little bit different.
• 38:06
  Speaker 3: But how to be very focused on quarter by quarter
• 38:10
  Speaker 3: by quarter and what we're doing and executing. But also
• 38:13
  Speaker 3: the one part I do try to push is let's
• 38:17
  Speaker 3: not forget the long term.
• 38:18
  Speaker 2: So I don't know anybody that's either on a board
• 38:23
  Speaker 2: or is an investor that is remotely enthusiastic about let's
• 38:28
  Speaker 2: stop reporting- quarterly numbers. It seems kind of absurd. But
• 38:35
  Speaker 2: at the same time, there's an increasing number of companies
• 38:40
  Speaker 2: that say, we don't know the future. We're not going
• 38:42
  Speaker 2: to give you guidance. That's your job as an analyst.
• 38:45
  Speaker 2: Our job is to run the company. Reconcile those two
• 38:48
  Speaker 2: with us.
• 38:49
  Speaker 3: So I think the move away from quarterly reporting is- frankly,
• 38:55
  Speaker 3: it's a false move. It does not accomplish anything.
• 38:58
  Speaker 2: I know they tried it in the UK and it
• 39:00
  Speaker 2: did nothing.
• 39:01
  Speaker 3: Did nothing. Could you simplify reporting?
• 39:04
  Speaker 1: Sure.
• 39:05
  Speaker 3: There's things we do that don't add any value to
• 39:09
  Speaker 3: the investment community and simplify it. I actually think quarterly
• 39:13
  Speaker 3: reporting is very important. I think transparency about what's happening
• 39:17
  Speaker 3: is incredibly critical. if the government were really, you know,
• 39:22
  Speaker 3: the regulators were really serious about the issue, the guidance
• 39:27
  Speaker 3: is where they would go. They would say, okay, we're
• 39:29
  Speaker 3: not going to allow guidance. You know, what's interesting is,
• 39:33
  Speaker 3: and I would have been in that camp 10 years ago.
• 39:37
  Speaker 3: You know, if someone, when I was, I went into
• 39:40
  Speaker 3: probably 100 boardrooms my last couple of years of Vanguard
• 39:43
  Speaker 3: because we were the largest shareholder. And people would ask,
• 39:46
  Speaker 3: you know, should we give guidance or not? I'd say, no,
• 39:48
  Speaker 3: you don't need to give guidance. What you do see, though,
• 39:52
  Speaker 3: is there are situations where the street gets it so
• 39:55
  Speaker 3: wrong that you're giving guidance to actually protect yourself from
• 40:00
  Speaker 3: the street getting it so wrong. And that's the part
• 40:03
  Speaker 3: that I've had to sort of balance in my own
• 40:05
  Speaker 3: head because I never really understood that until I was
• 40:10
  Speaker 3: in the boardroom. And then you see the conclusions some
• 40:13
  Speaker 3: of the sell side in particular comes to, and you're like, whoa,
• 40:17
  Speaker 3: that's not even remotely true. And then you have to
• 40:20
  Speaker 3: guide them. But look, to me, the single biggest thing
• 40:27
  Speaker 3: we could do would be, whether you give guidance or not,
• 40:31
  Speaker 3: would be to really hold companies accountable for providing long-term outlook.
• 40:39
  Speaker 3: So what if you took one earnings call a year?
• 40:41
  Speaker 3: I'm making this up, but we've talked about this at
• 40:43
  Speaker 3: CECP quite a bit. And you devote, you know, you
• 40:46
  Speaker 3: report on the quarter, but you devote it to here's
• 40:48
  Speaker 3: where we are against our five-year aspirations or our 10-year aspirations,
• 40:53
  Speaker 3: whatever the right timeframe is. Here's how we're doing. Here's,
• 40:57
  Speaker 3: by the way, you know, we told you last year
• 41:00
  Speaker 3: that five years from now, we want to do X.
• 41:03
  Speaker 3: The world's changed a little bit. We've got to pivot.
• 41:05
  Speaker 3: So we're not going to do X. We're going to
• 41:06
  Speaker 3: do two X. That to me would be a lot
• 41:10
  Speaker 3: more productive in terms of getting people to think long-term.
• 41:14
  Speaker 2: Really interesting. Last question on the boardroom. Are you ever
• 41:20
  Speaker 2: in a meeting where somebody that's on the board realizes,
• 41:24
  Speaker 2: oh my God, this is the former CEO of Vanguard. Hey, Bill,
• 41:28
  Speaker 2: I got a question on my 401k. How often does
• 41:31
  Speaker 2: that come up?
• 41:33
  Speaker 3: Actually, it happened a couple times. And You know, a
• 41:38
  Speaker 3: couple of my colleagues in different boards were actually big
• 41:41
  Speaker 3: 401k clients. So we did have good chats about that.
• 41:44
  Speaker 3: But most of these guys are pretty sophisticated. Yeah, I
• 41:47
  Speaker 3: can imagine. They don't need my help.
• 41:49
  Speaker 2: Coming up, we continue our conversation with Bill McNabb, former
• 41:53
  Speaker 2: CEO and chairman of the Vanguard Group, talking about startups
• 41:57
  Speaker 2: and the future of advice. I'm Barry Ritholtz. You're listening
• 42:01
  Speaker 2: to Masters in Business on Bloomberg Radio. I'm Barry Ritholtz.
• 42:16
  Speaker 2: You're listening to Masters in Business on Bloomberg Radio. My
• 42:21
  Speaker 2: extra special guest this week is Bill McNabb, former CEO
• 42:24
  Speaker 2: and chairman at the Vanguard Group, now sitting on a
• 42:28
  Speaker 2: few boards and advising private equity, venture capital, and startup firms,
• 42:34
  Speaker 2: which is really quite the pivot from a mutual fund
• 42:37
  Speaker 2: guy to a VC and PE sort of guy. What
• 42:42
  Speaker 2: attracted you to those fields and some of the younger
• 42:46
  Speaker 2: companies that you're advising.
• 42:49
  Speaker 3: So, you know, two things I would say, you know, one,
• 42:56
  Speaker 3: I had no experience in the private markets. Private markets
• 42:59
  Speaker 3: are growing dramatically. And I just felt like I need
• 43:03
  Speaker 3: to understand this better. And, you know, for me, that was,
• 43:06
  Speaker 3: you know, the chance to learn something new and hopefully
• 43:10
  Speaker 3: help while you're doing it. But, you know, Selfishly, I
• 43:13
  Speaker 3: thought I was going to learn a lot, and I've
• 43:15
  Speaker 3: been overwhelmed by how much I've learned and how much
• 43:19
  Speaker 3: more I have to learn. Second, during my last couple
• 43:24
  Speaker 3: years of Vanguard, we established a research group, and we
• 43:29
  Speaker 3: began to talk about doing some venture investing ourselves, not
• 43:33
  Speaker 3: about making money or on behalf of our clients, but
• 43:35
  Speaker 3: more just being in the ecosystem. And that all came
• 43:38
  Speaker 3: about because we did a trip to Silicon Valley, took
• 43:41
  Speaker 3: the whole leadership team, met with every large VC there,
• 43:44
  Speaker 3: a bunch of their portfolio companies, and we walked away
• 43:47
  Speaker 3: blown away by what we didn't know about our own
• 43:50
  Speaker 3: business and what the future might look like. And so
• 43:53
  Speaker 3: to me, no matter where you are in the investment arc,
• 44:00
  Speaker 3: if you will, understanding what goes on in the startup
• 44:04
  Speaker 3: world is, I think, just important to understanding the bigger picture.
• 44:09
  Speaker 3: And then the last thing I'd say, this is just
• 44:10
  Speaker 3: a passion play. Our mission, if you boiled everything down
• 44:17
  Speaker 3: at Vanguard, we wanted to make the world a better
• 44:18
  Speaker 3: place for investors. I mean, we got up every morning
• 44:20
  Speaker 3: and afternoon. I'm lucky I get to do that. And
• 44:24
  Speaker 3: the startups I'm working with, I believe very deeply that
• 44:27
  Speaker 3: they have the potential to make the world a better
• 44:30
  Speaker 3: place for investors. And if I can keep doing that
• 44:32
  Speaker 3: for the next 20 years, I'm going to be really happy.
• 44:35
  Speaker 2: So you're a senior advisor to Venrock. are you helping
• 44:40
  Speaker 2: them vet startups or ideas or founders? Like what, what's
• 44:44
  Speaker 2: your role with a fairly well-known venture fund like that?
• 44:50
  Speaker 3: So, you know, the partner with whom I work the
• 44:52
  Speaker 3: most is a guy named Nick Byam. He's incredible. He's just,
• 44:56
  Speaker 3: it sees round corners. He's got 25 years of experience
• 45:01
  Speaker 3: doing this. He's like, I learned something every time I
• 45:03
  Speaker 3: talked to him. So Nick, Nick will get approached by
• 45:09
  Speaker 3: a lot of different people. He will meet a lot
• 45:11
  Speaker 3: of different people. When he gets something that's interesting, you know,
• 45:15
  Speaker 3: I often get a call and it's like, hey, would
• 45:17
  Speaker 3: you talk to these guys and see what you think?
• 45:20
  Speaker 3: And so you and I both have good connections with
• 45:25
  Speaker 3: Jason Wank at Altruist.
• 45:27
  Speaker 2: And that's how my recent full disclosure, by the way,
• 45:30
  Speaker 2: not to only a recent guest, Rittles Wealth Management uses
• 45:34
  Speaker 2: Altruist as a custodian. The firm's venture arm is an
• 45:37
  Speaker 2: investor in it. I personally am an investor in it.
• 45:40
  Speaker 2: I always like to get those disclosures out so nobody
• 45:44
  Speaker 2: misunderstands what we're talking about.
• 45:46
  Speaker 3: And I'm an investor there too. So yes. But Nick
• 45:51
  Speaker 3: calls me after we first met and he says, there's
• 45:54
  Speaker 3: this guy I want you to meet and just tell
• 45:57
  Speaker 3: me what you think. He goes, we've invested. So Venrock
• 45:59
  Speaker 3: had actually already invested in this case. So I meet
• 46:02
  Speaker 3: Jason and I'm like, He had me on hello, right?
• 46:05
  Speaker 2: Super impressive.
• 46:06
  Speaker 3: Incredibly impressive. So the early days it was Nick, Jason
• 46:10
  Speaker 3: and me in the boardroom. And, um, you know, I
• 46:14
  Speaker 3: would say my role there was really twofold. One was
• 46:18
  Speaker 3: just Jason was a student of Vanguard and like, what
• 46:22
  Speaker 3: did we get right? What did we not get right?
• 46:24
  Speaker 3: How did we think about scaling? So I tried to
• 46:27
  Speaker 3: bring that to, you know, to the discussions in the boardroom.
• 46:31
  Speaker 3: And then very importantly, over time, you know, Jason particularly
• 46:36
  Speaker 3: asked me, like, can you, like, just talk to some
• 46:39
  Speaker 3: of my senior team on a regular basis? And so
• 46:42
  Speaker 3: I do. And, you know, that's the mentoring part. And
• 46:45
  Speaker 3: I think that's a big part of what, in a sense,
• 46:49
  Speaker 3: I'm there for is, you know, I've made a lot
• 46:51
  Speaker 3: of mistakes. I've, you know, sort of lived a lot
• 46:54
  Speaker 3: of different movies that they're going to now watch. And
• 46:58
  Speaker 3: live through. And live through. And, you know, Where is
• 47:01
  Speaker 3: it relevant and where is it not relevant? There are
• 47:05
  Speaker 3: situations where new ideas get presented and then I will
• 47:10
  Speaker 3: be part of the vetting process as well. So, you know, Vanilla,
• 47:16
  Speaker 3: which is a software product to help with estate planning.
• 47:22
  Speaker 3: You know, basically there's Steve Lakshan, who you know personally,
• 47:27
  Speaker 3: incredibly brilliant person. planner around all this. And it's like,
• 47:32
  Speaker 3: let's take his brain and codify it.
• 47:35
  Speaker 2: Turn it into software.
• 47:36
  Speaker 3: Turn it into software. And, um, you know, I got
• 47:40
  Speaker 3: a chance to interact and we knew, we knew Steve
• 47:42
  Speaker 3: a little bit from Vanguard and, and, and serving him, um,
• 47:46
  Speaker 3: you know, through the investment side, we started, um, an
• 47:50
  Speaker 3: RIA from scratch. So I don't know if we'll ever
• 47:53
  Speaker 3: be able to compete with you, but, um.
• 47:56
  Speaker 2: We're still under $ 10 billion, which I have to explain
• 48:00
  Speaker 2: to family members is walking around cash. It's not real money.
• 48:04
  Speaker 3: It's real money. You guys have done a great job.
• 48:07
  Speaker 3: But what if you had a blank sheet of paper
• 48:10
  Speaker 3: and could create a firm from scratch? So we're going
• 48:13
  Speaker 3: to do that. And we're in the process. It's called ARCA.
• 48:15
  Speaker 3: You may have seen some of the press releases on it.
• 48:18
  Speaker 3: I got a chance to work with... Two co-founders of three,
• 48:23
  Speaker 3: there are three co-founders of the firm Finney. And again,
• 48:26
  Speaker 3: you know, Finney, you know, Finney, Finney's a little different
• 48:30
  Speaker 3: because what Finney's trying to do is really help firms
• 48:34
  Speaker 3: do a better job matching prospects and clients and in
• 48:38
  Speaker 3: turning prospects, the right prospects into the right clients. This
• 48:42
  Speaker 3: is a huge problem in the RIA space.
• 48:45
  Speaker 2: People don't understand how important fit is. And we've been
• 48:49
  Speaker 2: fortunate to build that into our process because it's disruptive
• 48:54
  Speaker 2: for someone to come in. They're the wrong fit. They
• 48:57
  Speaker 2: transfer everything in. It's so much time and effort. It's
• 49:01
  Speaker 2: such a lift. And then six months later, everybody realizes, oh,
• 49:04
  Speaker 2: we've made a mistake. And then it's a divorce and
• 49:07
  Speaker 2: it's disruptive on the way out.
• 49:09
  Speaker 3: You know, we actually were really strict on client selection
• 49:13
  Speaker 3: in my time at Vanguard. And so when I when
• 49:15
  Speaker 3: I met the, you know, the two of the co-founders
• 49:19
  Speaker 3: in particular, I talked to a lot and they're describing
• 49:22
  Speaker 3: this to me. I'm like, Oh my God, I love
• 49:23
  Speaker 3: this stuff. I'm like, this is exactly how, you know,
• 49:26
  Speaker 3: it's one of the most important things you learn in
• 49:28
  Speaker 3: terms of building a great business is, is that, is
• 49:30
  Speaker 3: that fit? And they, they were doing, they were thinking
• 49:34
  Speaker 3: about things from a technology standpoint that were way beyond me.
• 49:37
  Speaker 3: I mean, they're, they're, you know, a bunch of AI engineers.
• 49:40
  Speaker 3: It didn't exist 15 years ago, 10 years ago even.
• 49:45
  Speaker 3: And so, you know, watching that, watching their thinking on that.
• 49:50
  Speaker 3: But very importantly, one of the cool things, and again,
• 49:53
  Speaker 3: I'm getting tactical here with Finney, but it's just interesting
• 49:56
  Speaker 3: to me because they developed a way, you know, they're
• 50:01
  Speaker 3: going to price this in a way that aligns outcomes
• 50:05
  Speaker 3: much more structurally sound. So, At Vanguard, one of the
• 50:10
  Speaker 3: cool things we did was where we had active equity,
• 50:13
  Speaker 3: for example, every active equity manager was on an incentive
• 50:19
  Speaker 3: scheme where if they outperformed over a long period of time,
• 50:22
  Speaker 3: we would actually pay more. And the expense ratio would
• 50:26
  Speaker 3: go up. And we were happy with that. And by
• 50:28
  Speaker 3: the way, if they didn't, they went the other way.
• 50:31
  Speaker 3: We're the only firm who did that across every active
• 50:35
  Speaker 3: equity portfolio. And we did that very early. you know,
• 50:39
  Speaker 3: Finney's doing a similar concept, an analogous concept with like,
• 50:44
  Speaker 3: you know, we're not going to be your traditional SAS
• 50:46
  Speaker 3: company where we charge these really big seat licenses and,
• 50:49
  Speaker 3: you know, we're negotiating who's using what we're going to
• 50:52
  Speaker 3: do it all on success. Like if, if, if you
• 50:54
  Speaker 3: get the right clients, we're going to, we'll earn more money.
• 50:57
  Speaker 3: And if you don't, that's, that's on us. It's a
• 51:01
  Speaker 3: really cool concept. And, and so again, I got tactical there,
• 51:06
  Speaker 3: but it makes a point that what you're really looking for,
• 51:10
  Speaker 3: if they get it right, it changes the industry in
• 51:13
  Speaker 3: a really positive way. Altruist gets it right, it changes
• 51:17
  Speaker 3: the industry in a really positive way.
• 51:18
  Speaker 2: So let's dive down into that a little deeper for
• 51:21
  Speaker 2: each of those. I had always been told, hey, custody
• 51:27
  Speaker 2: is razor thin margins. There's nothing you can do there.
• 51:30
  Speaker 2: And besides- Schwab and Fidelity, the Giants in that space,
• 51:34
  Speaker 2: no one's going to take them on. You have to
• 51:37
  Speaker 2: be a little crazy to say, I'm going to take
• 51:41
  Speaker 2: on the two behemoths. But they've become, Altruist has become
• 51:46
  Speaker 2: the third largest custodian for RIAs, at least if we're
• 51:50
  Speaker 2: going by advisor served. I don't know what it looks
• 51:53
  Speaker 2: like by dollar amount. What did you see when you
• 51:58
  Speaker 2: first started talking to Jason Wank? about what has always
• 52:03
  Speaker 2: been such a challenging low-margin business.
• 52:07
  Speaker 3: Jason had this vision that the legacy players do a
• 52:13
  Speaker 3: fine job at a level, but in a sense, these
• 52:17
  Speaker 3: businesses had become, I hate the term cash cow, but
• 52:20
  Speaker 3: there's not a lot of innovation, not a lot of
• 52:23
  Speaker 3: new technology being brought to bear.
• 52:25
  Speaker 2: I want to say two years ago, and I hope
• 52:27
  Speaker 2: I'm not getting this wrong, I think it was Schwab
• 52:30
  Speaker 2: was generating 57% of their revenue just from the cash
• 52:36
  Speaker 2: sweep that they're paying a few bips on but earning 3%, 4% on.
• 52:41
  Speaker 3: Spreads everything there. That's exactly right. So, you know, he
• 52:47
  Speaker 3: had this– and he had been an advisor. And so
• 52:51
  Speaker 3: he's like, what do I really want? And so the way–
• 52:55
  Speaker 3: we thought about it was, yes, there's custody and we
• 52:58
  Speaker 3: can digitize it and we can make it much more efficient.
• 53:01
  Speaker 3: We can make it much better, lower cost, frankly, for
• 53:05
  Speaker 3: the advisor so they can pass on value to the client.
• 53:10
  Speaker 3: You can though actually make it a platform that's more
• 53:14
  Speaker 3: than just custody. So we introduced Hazel, which is this
• 53:18
  Speaker 3: great tax planning capability, as you know, AI driven, and.
• 53:21
  Speaker 2: It's Everybody in my firm loves it. And P.S., Jason
• 53:26
  Speaker 2: was more than an advisor. He's an engineer. So he
• 53:29
  Speaker 2: brings sort of that coder mentality to how can we
• 53:33
  Speaker 2: use technology to make this faster, better, cheaper.
• 53:36
  Speaker 3: So the way I always envisioned the direction we go
• 53:40
  Speaker 3: was this is going to be the platform of the
• 53:44
  Speaker 3: future for advisors. And we will make it so much
• 53:47
  Speaker 3: easier for them to do what they need to do.
• 53:52
  Speaker 3: And Jason's got that engineering mentality. He's got that drive.
• 53:57
  Speaker 3: He's incredibly passionate.
• 54:00
  Speaker 1: If you look at the Altruist flywheel, it looks a
• 54:06
  Speaker 1: lot like the Vanguard flywheel did in terms of just this,
• 54:10
  Speaker 1: if it works, this self-reinforcing perpetual improvement, perpetual driver of
• 54:16
  Speaker 1: good outcomes has been created.
• 54:20
  Speaker 2: What's the old line? I think this was Jeff Bezos.
• 54:23
  Speaker 2: Your margin is my opportunity. That seems to be what's
• 54:26
  Speaker 2: happening there. Tell us a little more about Vanilla. What
• 54:30
  Speaker 2: are they doing and where is the disruptive opportunity there?
• 54:34
  Speaker 3: So with Vanilla, if you think about at the high
• 54:40
  Speaker 3: net worth and ultra high net worth, which is a
• 54:43
  Speaker 3: significant amount of assets in the industry, We talk about
• 54:47
  Speaker 3: asset allocation. We talk about cost. At Vanguard, we really
• 54:50
  Speaker 3: talk about cost a lot. The single biggest opportunity for
• 54:54
  Speaker 3: value-add is in estate planning. You can save people millions
• 54:59
  Speaker 3: of dollars where there's no other category that can do that.
• 55:06
  Speaker 3: Vanilla changes the experience dramatically for the advisor providing that
• 55:11
  Speaker 3: estate planning rather than whiteboards and stickies and flow diagrams, hand-drawn.
• 55:17
  Speaker 3: It just gives you this incredible automated output. And I
• 55:24
  Speaker 3: got a chance to be kind of an early pilot
• 55:26
  Speaker 3: because Vanguard was actually an investor in Vanilla.
• 55:30
  Speaker 2: Vanguard itself.
• 55:31
  Speaker 3: Oh, really? Yep. And they were running pilots. So I
• 55:38
  Speaker 3: raised my hand and said, the best– conversation I've ever
• 55:44
  Speaker 3: had with the advice team that does our family. Wow.
• 55:47
  Speaker 3: By far. Because we got, I mean, it built this
• 55:50
  Speaker 3: whole balance sheet in one place. All the family trees,
• 55:57
  Speaker 3: if you will, were all right there, all done in
• 56:00
  Speaker 3: an automated fashion.
• 56:01
  Speaker 2: And Vanilla is a product that is not necessarily the
• 56:05
  Speaker 2: end investor, but the advisor in between.
• 56:07
  Speaker 3: Yeah.
• 56:08
  Speaker 2: It's a little complex for the average person to just
• 56:11
  Speaker 2: log on on their own. The whole estate planning process.
• 56:14
  Speaker 3: It really is a business. It's really being sold to advisors.
• 56:18
  Speaker 3: So you're seeing wealth management firms adopt it. So the
• 56:23
  Speaker 3: vanguards of the world and other big firms you would
• 56:26
  Speaker 3: know well bringing it in and saying, this is going
• 56:29
  Speaker 3: to be the platform where we do estate planning.
• 56:32
  Speaker 2: So I'm hearing a very consistent theme, which is all
• 56:36
  Speaker 2: of the disruptive fintech that you're involved with, Finney- altruist
• 56:42
  Speaker 2: vanilla seems to be all marketed to the advisor is
• 56:48
  Speaker 2: it which is so different from what you're doing on
• 56:50
  Speaker 2: the board seats any other startups or or other technologies
• 56:54
  Speaker 2: you're looking at either to the advisory community or anywhere
• 56:59
  Speaker 2: else you.
• 57:00
  Speaker 3: Know um yeah so i've been involved in a couple
• 57:03
  Speaker 3: of others um One, there's a company called Moment, which
• 57:08
  Speaker 3: is some ex-Citadel guys who really are reinventing the way
• 57:13
  Speaker 3: fixed income gets traded. And I'm not an investor there,
• 57:18
  Speaker 3: but I like to think of myself as a friend
• 57:21
  Speaker 3: of the firm. And Venrock is an investor there. And
• 57:25
  Speaker 3: so I have those conversations. Again, the theme is not
• 57:30
  Speaker 3: dissimilar in that you're making the world better. better because
• 57:34
  Speaker 3: they're doing things with fixed income trading that have been
• 57:37
  Speaker 3: done on the equity side for years. Fractional trading of bonds,
• 57:42
  Speaker 3: they make it like that. And they're really having a
• 57:46
  Speaker 3: pretty significant impact. There's one that we're involved in. Again,
• 57:52
  Speaker 3: I'm not an investor in this one either, but I
• 57:56
  Speaker 3: talk to them a lot around litigation. So that's a
• 57:59
  Speaker 3: little bit different. It's my one non-investment-oriented thing.
• 58:03
  Speaker 2: What's the name of that firm?
• 58:05
  Speaker 3: Sillow. Okay. And again, what's really cool about them is
• 58:10
  Speaker 3: it's a marriage of incredible legal talent with engineering mindset.
• 58:15
  Speaker 3: So imagine the Jason Wenk of litigation lawyers. People who
• 58:23
  Speaker 3: write code, but have deep litigation experience.
• 58:26
  Speaker 2: There have been a handful of funds over the past
• 58:29
  Speaker 2: few years that literally are making investments based on litigation outcomes,
• 58:35
  Speaker 2: class action outcomes. And they're truly non-correlated because the outcomes
• 58:41
  Speaker 2: have nothing to do with the market or the economy.
• 58:44
  Speaker 2: It's a really interesting space.
• 58:45
  Speaker 3: Yeah. And this company will do things that will This
• 58:50
  Speaker 3: is going to disrupt this industry as much as anything
• 58:53
  Speaker 3: we've talked about. So for me, the fun part is
• 59:00
  Speaker 3: all these entrepreneurs, it's like you're getting a chance to
• 59:06
  Speaker 3: work with some of the brightest minds in the country.
• 59:08
  Speaker 3: They're all super passionate. about what they do. And they're
• 59:13
  Speaker 3: incredibly talented. And you're not going to get it all right.
• 59:16
  Speaker 3: Some of them are going to be more successful than others.
• 59:19
  Speaker 3: But if you can sort of help them along a
• 59:23
  Speaker 3: little bit, with lessons learned and whatnot, you know, it's,
• 59:26
  Speaker 3: it's incredibly gratifying.
• 59:28
  Speaker 2: You give them the best chance for, for future success. Um, so,
• 59:32
  Speaker 2: so the future of advice going forward, uh, you, you've mentioned, uh,
• 59:37
  Speaker 2: some of the robo advisors like, um, Betterment and Wealthfront.
• 59:42
  Speaker 2: And in fact, the robo advisor that Vanguard set up
• 59:45
  Speaker 2: under your leadership quickly scaled up to a hundred billion plus,
• 59:49
  Speaker 2: and then kept going. Now the biggest, by far the biggest, uh,
• 59:53
  Speaker 2: robo in the world. But it doesn't sound like you
• 59:59
  Speaker 2: think that the future of advice is just going to
• 1:00:02
  Speaker 2: be automated or technology. What is the future of advice
• 1:00:08
  Speaker 2: look like for both the average mom and pop investor
• 1:00:13
  Speaker 2: who needs some help planning their retirement or paying for
• 1:00:16
  Speaker 2: kids college, or the higher net worth that's thinking about
• 1:00:21
  Speaker 2: what am I going to do with this extra capital
• 1:00:23
  Speaker 2: in terms of philanthropy or generational wealth, straight up to
• 1:00:27
  Speaker 2: the multifamily offices and big numbers.
• 1:00:31
  Speaker 3: So look, I think there's going to be a spectrum.
• 1:00:34
  Speaker 3: I do think there will be people who go the
• 1:00:36
  Speaker 3: automated way, fully automated, the original Wealthfront model, if you will.
• 1:00:42
  Speaker 3: But increasingly, I'm pretty convinced that the bulk of the people, investors,
• 1:00:53
  Speaker 3: are going to go with advisors where there's a human touch.
• 1:00:56
  Speaker 3: I think that human touch is incredibly important. And so
• 1:00:59
  Speaker 3: all the technological advances that we're seeing, whether it's Vanilla's
• 1:01:03
  Speaker 3: software planning, whether it's the platform that Altros is developing,
• 1:01:07
  Speaker 3: whether it's Finney's ability to help you, you know, grow
• 1:01:10
  Speaker 3: your business more effectively and organically, those things free up
• 1:01:17
  Speaker 3: the advisor to do the personal stuff. And so, you know,
• 1:01:23
  Speaker 3: I don't know at Ritholtz what your average number of
• 1:01:27
  Speaker 3: clients per advisor is, but let's just say it's 100,
• 1:01:30
  Speaker 3: which is in the industry kind of a norm. I
• 1:01:33
  Speaker 3: see no reason why somebody can't serve 300 more effectively
• 1:01:37
  Speaker 3: than they serve the 100 today with the technology that's coming.
• 1:01:41
  Speaker 3: And the reason I think it's important to have that
• 1:01:45
  Speaker 3: person is I think that the really thoughtful advisor can
• 1:01:50
  Speaker 3: really prevent you from getting off the reservation. The automated
• 1:01:55
  Speaker 3: programs are great, but people can opt out of them
• 1:01:57
  Speaker 3: pretty quickly. And we do see that. And again, you
• 1:02:01
  Speaker 3: said the last six months are always indicative. One of
• 1:02:04
  Speaker 3: the things that we didn't talk about, but it's incredibly
• 1:02:07
  Speaker 3: troubling to me, is the over-gamification of investing that's going
• 1:02:11
  Speaker 3: on right now and the amount of day trading. We're
• 1:02:14
  Speaker 3: back to day trading. Sure.
• 1:02:15
  Speaker 2: I started in the 90s when that was... I remember
• 1:02:21
  Speaker 2: the E-Trade commercials and The tow truck driver who owned
• 1:02:26
  Speaker 2: an island, he just likes to help people who get
• 1:02:28
  Speaker 2: flat tires. So he's still doing it. Like that was,
• 1:02:32
  Speaker 2: and it's full circle between... The prediction markets and then
• 1:02:36
  Speaker 2: all the gambling apps were right back to.
• 1:02:38
  Speaker 3: Where- And you actually see it in trading volumes.
• 1:02:43
  Speaker 2: End of day options, single day options.
• 1:02:47
  Speaker 3: It's not all being done by algos and hedge funds.
• 1:02:50
  Speaker 3: There's a retail element now that's incredible. And again, you
• 1:02:54
  Speaker 3: take an S & P 100 stock that might have
• 1:02:57
  Speaker 3: traded 10 million shares a day. Now it's trading- 50, 60,
• 1:03:03
  Speaker 3: 70 million shares a day. And it becomes a self-perpetuating thing.
• 1:03:08
  Speaker 3: The more volatility there is, the more the day traders
• 1:03:11
  Speaker 3: come in. The more they come in, the more volatility
• 1:03:14
  Speaker 3: there is. And at the end of the day, you
• 1:03:17
  Speaker 3: know that only the house wins there. The house will win.
• 1:03:22
  Speaker 2: Same is true with the prediction markets. There's a tiny
• 1:03:25
  Speaker 2: percentage of consistent winners and 90-something percent of people are
• 1:03:31
  Speaker 2: making donations.
• 1:03:32
  Speaker 3: That's right. So that's why I think the person remains
• 1:03:35
  Speaker 3: incredibly important. So, you know, it was interesting in a
• 1:03:38
  Speaker 3: venture capital conference I was at, you know, somebody asked
• 1:03:41
  Speaker 3: the question, they said, do you think that all the
• 1:03:43
  Speaker 3: AI and all the, all the technology that's coming is
• 1:03:46
  Speaker 3: going to replace humans or enable humans? And I think it's,
• 1:03:50
  Speaker 3: I think there are places where you can say it's replacement.
• 1:03:53
  Speaker 3: Could be both. Yeah, it could be both. I think here,
• 1:03:55
  Speaker 3: the majority of it's going to be enable.
• 1:03:58
  Speaker 2: So what, Just to share a little bit of what
• 1:04:01
  Speaker 2: we've been seeing, it's not that we're creating new information.
• 1:04:07
  Speaker 2: We're finding ways to take notes and keep running dialogue
• 1:04:15
  Speaker 2: of everything that's going on with AI, but then access
• 1:04:20
  Speaker 2: it and use it in a way that is just
• 1:04:22
  Speaker 2: enormously helpful to clients. And very often, you know, if
• 1:04:28
  Speaker 2: you're having a conversation with a client that's an hour,
• 1:04:31
  Speaker 2: you're doing a year-end review or maybe it's a quarterly
• 1:04:34
  Speaker 2: review or anything like that, lots of stuff goes by
• 1:04:37
  Speaker 2: that you may not pick up in that moment. But
• 1:04:41
  Speaker 2: if you have a tool taking notes and reviewing it
• 1:04:43
  Speaker 2: and summarizing it and remembering that two years ago they said,
• 1:04:48
  Speaker 2: we'd really like to buy a vacation property now that
• 1:04:51
  Speaker 2: the kids are out of the house, but we're not
• 1:04:53
  Speaker 2: sure what we can afford. hey, if you can access
• 1:04:56
  Speaker 2: that and not forget it, if you have a permanent memory,
• 1:05:00
  Speaker 2: not only can you successfully manage more clients, but you're
• 1:05:05
  Speaker 2: going to do a much better job of it. And
• 1:05:08
  Speaker 2: so the fear of all this job loss, I mean,
• 1:05:12
  Speaker 2: it's certainly not showing up in much of the data yet.
• 1:05:16
  Speaker 2: You still have relatively low unemployment and relatively low unemployment
• 1:05:20
  Speaker 2: for people under 25, which usually runs about double The
• 1:05:24
  Speaker 2: traditional U3 unemployment. So I'm fascinated by this. Do you
• 1:05:33
  Speaker 2: recall in the mid-2010s, the assumption was, oh, these robo-advisors,
• 1:05:38
  Speaker 2: they're going to put all the humans out of business.
• 1:05:42
  Speaker 2: Is this just an ongoing Luddite fear that every new
• 1:05:46
  Speaker 2: technology leads to?
• 1:05:48
  Speaker 3: I think so. Because, look, there is disruption. I mean,
• 1:05:51
  Speaker 3: there will be.
• 1:05:53
  Speaker 2: And certain jobs are going to go away.
• 1:05:54
  Speaker 3: Right. And when you're in the middle of that, it's overwhelming.
• 1:05:58
  Speaker 3: But I do believe that the creation of new categories
• 1:06:02
  Speaker 3: of jobs, we can't even imagine it's going to continue.
• 1:06:07
  Speaker 3: I do think there are areas where the technology just
• 1:06:09
  Speaker 3: allows you to do more, like you described. It's interesting.
• 1:06:16
  Speaker 3: We had an interesting thought experiment. So when the robos
• 1:06:22
  Speaker 3: started Um, our, I, our idea was to take the
• 1:06:27
  Speaker 3: best of Wealthfront technologically, but to have a certified financial
• 1:06:32
  Speaker 3: planner at the, on the, at the end of the
• 1:06:34
  Speaker 3: telephone or video screen to interface with the client. And
• 1:06:40
  Speaker 3: my chief of staff, who was a 20 something software
• 1:06:43
  Speaker 3: engineer at the time said, like, no, like who needs,
• 1:06:47
  Speaker 3: who needs a person? Like, and I said, well, how much,
• 1:06:50
  Speaker 3: you know, So I said, so we formed a little,
• 1:06:52
  Speaker 3: we got a little focus group. This is completely unscientific.
• 1:06:56
  Speaker 3: This is, again, sometimes how I like to do things.
• 1:06:58
  Speaker 3: And so we sat around and we said, so I
• 1:07:02
  Speaker 3: give you $ 25, 000, but you want a little bit of advice.
• 1:07:05
  Speaker 3: They all wanted Robo. Like, I don't want to talk
• 1:07:07
  Speaker 3: to somebody. I said, it's $ 150, 000, which for them at
• 1:07:11
  Speaker 3: the time was probably equal to a year's pay. Four
• 1:07:15
  Speaker 3: or five out of the six were like, I got
• 1:07:19
  Speaker 3: to have a person. Like, Technology can be helpful, but
• 1:07:22
  Speaker 3: I need to be able to talk to somebody for
• 1:07:23
  Speaker 3: that amount of money. And it really stuck with me.
• 1:07:28
  Speaker 3: There is a comfort. And again, you've done a lot
• 1:07:32
  Speaker 3: with Morgan Housel over the years. The psychology of that
• 1:07:37
  Speaker 3: and that need for human interaction, I think, is very powerful.
• 1:07:41
  Speaker 2: So I always hated the idea. Listen, I'm a middle
• 1:07:45
  Speaker 2: class kid from the suburbia. I didn't grow up with
• 1:07:48
  Speaker 2: any money or anything. thoughts of an inheritance or anything
• 1:07:52
  Speaker 2: like that. The idea of having a 10 million or
• 1:07:55
  Speaker 2: even a $ 1 million minimum was, I was never comfortable with.
• 1:07:59
  Speaker 2: So we set up two digital platforms, one driven by Betterment,
• 1:08:05
  Speaker 2: which is under a quarter million dollars. And there is
• 1:08:08
  Speaker 2: a group of advisors that come along with that. So
• 1:08:12
  Speaker 2: if you're a 50 or a hundred or $ 5, 000, it
• 1:08:15
  Speaker 2: doesn't matter. There's no minimum. If you're up to quarter
• 1:08:18
  Speaker 2: million dollars, The whole platform is digital, everything from the
• 1:08:23
  Speaker 2: onboard to the allocation. But there is a live human
• 1:08:26
  Speaker 2: being there if you want to talk to somebody. And
• 1:08:30
  Speaker 2: then the platform that we built from a quarter million
• 1:08:34
  Speaker 2: to a million was based on buying BlackRock's future advisor,
• 1:08:39
  Speaker 2: which they figured out, oh, this isn't the future of ETFs.
• 1:08:42
  Speaker 2: We don't need to own this. And so we ended
• 1:08:45
  Speaker 2: up purchasing that from them. Not only is that $ 250
• 1:08:50
  Speaker 2: to a million, but it comes with also with a
• 1:08:52
  Speaker 2: specific advisor. And as much as people say, I love
• 1:08:58
  Speaker 2: the digital platform, I don't need to deal with anybody
• 1:09:00
  Speaker 2: I just want to log on to the website or
• 1:09:03
  Speaker 2: app and deal with it as soon as there's any
• 1:09:06
  Speaker 2: volatility they just want someone to talk them off the
• 1:09:09
  Speaker 2: ledge and say hey it'll be fine we go through
• 1:09:13
  Speaker 2: a 10% drawdown you know two out of every three
• 1:09:17
  Speaker 2: I want to say it's three times every two years,
• 1:09:19
  Speaker 2: something like that. So this is normal. And if you
• 1:09:23
  Speaker 2: look at, here's how many drawdowns we've had over the
• 1:09:26
  Speaker 2: past 20 years, they may not know that, they may
• 1:09:30
  Speaker 2: not have access to that. But if a person says, hey,
• 1:09:32
  Speaker 2: we can't guarantee you that the market's going to keep
• 1:09:36
  Speaker 2: going up forever, but here's what the history looks like.
• 1:09:40
  Speaker 2: It's just a huge comfort for people and they could
• 1:09:42
  Speaker 2: stay out of their own way.
• 1:09:43
  Speaker 3: Absolutely. So I think it's really powerful. And again- Thematically,
• 1:09:49
  Speaker 3: certainly everything we're working on in a lot of our
• 1:09:52
  Speaker 3: startup land is exactly taking that concept.
• 1:09:57
  Speaker 2: Using the technology to make it faster, better, cheaper, but
• 1:10:00
  Speaker 2: making sure a person is in the loop for that
• 1:10:02
  Speaker 2: comfort level.
• 1:10:03
  Speaker 3: Faster, better, cheaper, way more personalized. Way more personalized.
• 1:10:06
  Speaker 2: So we've covered so much stuff. Before I get to
• 1:10:09
  Speaker 2: my favorite questions, is there anything we haven't covered yet?
• 1:10:15
  Speaker 3: Think we're good.
• 1:10:16
  Speaker 2: We touched a lot of stuff. So let's jump to
• 1:10:20
  Speaker 2: those questions. And I've asked you these 10 years ago,
• 1:10:23
  Speaker 2: but I want to circle back to them.
• 1:10:25
  Speaker 3: See if I'm consistent. Right.
• 1:10:26
  Speaker 2: Well, we'll see what's changed over the past decade. So
• 1:10:30
  Speaker 2: I'm going to assume your mentors are all fairly much
• 1:10:33
  Speaker 2: the same. Tell us who, Jack Brennan, clearly one of
• 1:10:36
  Speaker 2: those people. Who were the mentors who shaped your career?
• 1:10:40
  Speaker 3: So Jack Brennan certainly, and I talked about that earlier,
• 1:10:44
  Speaker 3: but lead by example and the power of we versus I.
• 1:10:47
  Speaker 3: I had a rowing coach post-college. And his big thing
• 1:10:54
  Speaker 3: to me when I was thinking about leaving New York
• 1:10:57
  Speaker 3: and going to Vanguard was find a place that matches
• 1:11:00
  Speaker 3: your values and you'll be happy. And I dedicated my
• 1:11:05
  Speaker 3: last annual report at Vanguard to you know, Vanguard funds
• 1:11:09
  Speaker 3: to him, you know, a section of it to him,
• 1:11:11
  Speaker 3: because that advice actually was what put me over the
• 1:11:15
  Speaker 3: top in terms of, I got to go to Vanguard.
• 1:11:18
  Speaker 3: You know, the, the other, there were so many other mentors.
• 1:11:22
  Speaker 3: One I'll mention though, we had a great board in
• 1:11:26
  Speaker 3: early in my career and Charlie Ellis, who, you know, the,
• 1:11:31
  Speaker 3: the great author of winning the loser's game, Charlie was
• 1:11:33
  Speaker 3: on our board. And Charlie was actually a real mentor
• 1:11:36
  Speaker 3: to me because when he was at Greenwich and he
• 1:11:41
  Speaker 3: would come and present to us how we did competitively
• 1:11:44
  Speaker 3: in the 401k market. And I was running that business.
• 1:11:47
  Speaker 3: So we developed a pretty good bond. Then when he
• 1:11:49
  Speaker 3: came on the board, he just was always there to
• 1:11:53
  Speaker 3: sort of push and prod a little bit and help
• 1:11:57
  Speaker 3: shape me. And again, the way he thought about investing
• 1:12:02
  Speaker 3: just Absolutely resonated, obviously, with what we were doing.
• 1:12:05
  Speaker 2: He just wrote a new book, just dropped a few
• 1:12:07
  Speaker 2: months ago. He's still active in his 80s.
• 1:12:10
  Speaker 3: It's incredible. It's incredible.
• 1:12:12
  Speaker 2: Speaking of books, what are some of your favorites? What
• 1:12:14
  Speaker 2: are you reading currently?
• 1:12:16
  Speaker 3: So right now, I'm reading Jim Collins' What to Make
• 1:12:20
  Speaker 3: of a Life, which is very different for him. It's
• 1:12:24
  Speaker 3: not a business-oriented book. As I mentioned to you in
• 1:12:29
  Speaker 3: other times, good to great and built to last. Jim
• 1:12:32
  Speaker 3: Collins classics, you know, they're the first business books I
• 1:12:37
  Speaker 3: go to. Um, but this is what he does is
• 1:12:40
  Speaker 3: he takes lives of people we know in sort of
• 1:12:44
  Speaker 3: pairs and he just like, what were the key events
• 1:12:47
  Speaker 3: that made them do what they do? So, um, he
• 1:12:52
  Speaker 3: uses like two football players, um, from when I was
• 1:12:55
  Speaker 3: growing up, um, uh, Carl, Carl, Carl Eller and Alan page,
• 1:13:00
  Speaker 3: Minnesota Vikings. One of them went on to have a
• 1:13:04
  Speaker 3: real drug problem and then become an incredible champion of
• 1:13:09
  Speaker 3: rehabilitation and did so much for his community. The other
• 1:13:12
  Speaker 3: one went on to be a Supreme Court justice in Minnesota.
• 1:13:15
  Speaker 2: Wow.
• 1:13:16
  Speaker 3: And what were the key decisions? What allowed them to
• 1:13:18
  Speaker 3: go from this great football career to a second act?
• 1:13:22
  Speaker 3: So anyway, I'm reading that. I'm partway through it. It's phenomenal.
• 1:13:25
  Speaker 3: And I always have a fun book or two I'm reading, too.
• 1:13:30
  Speaker 3: So I have still a big science fiction collection. So
• 1:13:33
  Speaker 3: The Strength of the Many and The Strength of the Few,
• 1:13:37
  Speaker 3: it's two parts. There's a third one coming. Imagine ancient
• 1:13:41
  Speaker 3: Rome meets The Matrix. That's all I'm going to say.
• 1:13:44
  Speaker 2: Wow.
• 1:13:45
  Speaker 3: Only a weird brain like mine could.
• 1:13:46
  Speaker 2: Find that fascinating. That's intriguing. I watched and read Project
• 1:13:54
  Speaker 2: Hail Mary, written by the same author as The Martian.
• 1:13:58
  Speaker 3: Andy Weir.
• 1:13:59
  Speaker 2: Really fascinating book. He's such a great writer.
• 1:14:01
  Speaker 3: He's phenomenal. One of my favorites.
• 1:14:03
  Speaker 2: Um, speaking of, of movies and, or, uh, videos or podcasts,
• 1:14:09
  Speaker 2: what are you streaming, listening to watching these days?
• 1:14:13
  Speaker 3: You know, not, not a ton. Um, the, the, the
• 1:14:16
  Speaker 3: most recent podcast was the acquired podcast. Um, they did
• 1:14:20
  Speaker 3: a huge thing on Vanguard, um, mostly on Jack Bogle.
• 1:14:23
  Speaker 3: It was great. Um, it was really, really worth doing, um,
• 1:14:26
  Speaker 3: Ben Gilbert and his partner. Um, they just did, uh,
• 1:14:30
  Speaker 3: a fantastic job. You know, um, Most of the other things,
• 1:14:36
  Speaker 3: the streaming, I just rewatched. Netflix did this three-year series
• 1:14:43
  Speaker 3: on the Tour de France I'm fascinated by in sports
• 1:14:46
  Speaker 3: called Unchained, and it's really good. So that was sort
• 1:14:49
  Speaker 3: of a fun one.
• 1:14:51
  Speaker 2: Our final two questions. What sort of advice would you
• 1:14:55
  Speaker 2: give to a recent college grad interested in a career
• 1:14:59
  Speaker 2: in either financial advice, wealth management, or FinTech startups?
• 1:15:06
  Speaker 3: Well, so on the latter, there's never been a better
• 1:15:09
  Speaker 3: time to start a company. You know, with technology being
• 1:15:13
  Speaker 3: as ubiquitous as it is and cheap, frankly, you can
• 1:15:18
  Speaker 3: take an idea and you can build something pretty quickly
• 1:15:21
  Speaker 3: without a ton of money. And then if it's a
• 1:15:24
  Speaker 3: really cool idea, you know, there are people ready to
• 1:15:27
  Speaker 3: help you.
• 1:15:29
  Speaker 2: And write a check.
• 1:15:29
  Speaker 3: And write a check. And so I'm encouraging... People who
• 1:15:34
  Speaker 3: have that entrepreneurial itch, this is a great time to
• 1:15:36
  Speaker 3: scratch it. Like, don't wait. But, you know, think about
• 1:15:40
  Speaker 3: what you're trying to do. Don't do it just because
• 1:15:43
  Speaker 3: you want to quote unquote get rich. Do it because
• 1:15:45
  Speaker 3: you have an idea that really matters. And something, I
• 1:15:49
  Speaker 3: always apply this, it's a Jim Collins phrase, the hedgehog concept.
• 1:15:55
  Speaker 3: What are you passionate about? What can you be great at?
• 1:15:58
  Speaker 3: And I mean great. And then how does it drive
• 1:16:02
  Speaker 3: the economic engine? And so you want to have a passion.
• 1:16:06
  Speaker 3: You want something that you truly believe you can be
• 1:16:08
  Speaker 3: world class at. And it's got to economically, there's got
• 1:16:13
  Speaker 3: to be an engine that it drives. And if you,
• 1:16:17
  Speaker 3: you know, today, it's just a great time to be
• 1:16:19
  Speaker 3: doing that. If you're going into the asset management investment world,
• 1:16:24
  Speaker 3: I think the two places that are going to be
• 1:16:26
  Speaker 3: the most interesting, you know, I continue to think the
• 1:16:29
  Speaker 3: venture world is really interesting because this, you know, whatever
• 1:16:35
  Speaker 3: anybody's politics are, whatever, all this stuff.
• 1:16:37
  Speaker 2: It's cutting edge. It's the latest and greatest.
• 1:16:40
  Speaker 3: There are so many cool things going on right now.
• 1:16:44
  Speaker 3: And the chance to actually go explore that and invest
• 1:16:49
  Speaker 3: in that is kind of fun. But I think wealth management,
• 1:16:54
  Speaker 3: I think the idea, I think this advice thing has
• 1:16:58
  Speaker 3: got a long way to run. And if I were
• 1:17:02
  Speaker 3: a young grad rather than going into a traditional asset management,
• 1:17:07
  Speaker 3: I would be thinking much more about individual wealth and
• 1:17:10
  Speaker 3: how to start my own advisory firm or how to
• 1:17:13
  Speaker 3: be part of a Ritholtz Wealth or something like that.
• 1:17:17
  Speaker 2: Our final question, what do you know about the world
• 1:17:20
  Speaker 2: of investing today that might have been useful back in
• 1:17:24
  Speaker 2: 1986 when you first joined Vanguard?
• 1:17:28
  Speaker 3: Not so much. You know, The long term really is
• 1:17:34
  Speaker 3: the way to think about things. I think even though
• 1:17:37
  Speaker 3: I joined a firm that was famous for it, I
• 1:17:40
  Speaker 3: don't think my own brain was set around long term.
• 1:17:44
  Speaker 3: And the ability to sustain your beliefs and your discipline
• 1:17:50
  Speaker 3: over the long run is a singular differentiator. And I've
• 1:17:56
  Speaker 3: had the privilege of being inside of a lot of
• 1:17:59
  Speaker 3: different firms. And it's amazing how many people don't actually
• 1:18:02
  Speaker 3: still get that. So I think that, and it took
• 1:18:05
  Speaker 3: me a while before I got there, so I wish
• 1:18:07
  Speaker 3: I'd had it right away. You know, second for me
• 1:18:13
  Speaker 3: is really pay a lot of attention to things that
• 1:18:19
  Speaker 3: nobody's talking about. You know, and this is much harder.
• 1:18:25
  Speaker 3: So as you know, when you started The Big Picture,
• 1:18:28
  Speaker 3: I actually started every morning with reading the big picture
• 1:18:31
  Speaker 3: because you did a really good job curating what was
• 1:18:33
  Speaker 3: out there and getting rid of a lot of stuff.
• 1:18:37
  Speaker 2: There's a long history, which we'll discuss offline. But when
• 1:18:43
  Speaker 2: Brandon said to me, hey, I've been a reader of
• 1:18:45
  Speaker 2: your stuff, when I first met him at some large conference,
• 1:18:50
  Speaker 2: room of lunch 20 years ago, my head exploded.
• 1:18:55
  Speaker 3: I might have been one of the people who pushed
• 1:18:58
  Speaker 3: it that way. But to me, it was a really
• 1:19:00
  Speaker 3: important thing. And I think today... people aren't talking about
• 1:19:08
  Speaker 3: leverage that much. And I worry about leverage. When you
• 1:19:13
  Speaker 3: look at what the hyperscalers are doing in terms of
• 1:19:15
  Speaker 3: the bond market right now, and a couple of them
• 1:19:19
  Speaker 3: are not net cash flow positive because of all the
• 1:19:23
  Speaker 3: infrastructure that they're building. The leverage in the system, private
• 1:19:27
  Speaker 3: credit had its moment a year ago or whatever, six
• 1:19:31
  Speaker 3: months ago. And that was one you could see coming
• 1:19:36
  Speaker 3: I worry a lot about leverage. No one's talking about it.
• 1:19:43
  Speaker 3: When I first started out, that way of thinking, that
• 1:19:47
  Speaker 3: contrariness was not part of how I had been trained
• 1:19:52
  Speaker 3: or brought up. But again, this is where a Jack Bogle,
• 1:19:55
  Speaker 3: a Jack Brennan, John Neff, the great value investor, they
• 1:19:59
  Speaker 3: were really impactful.
• 1:20:01
  Speaker 2: I was going through an old piece I was writing
• 1:20:05
  Speaker 2: and never finished. And I found some notes and I
• 1:20:08
  Speaker 2: can't figure out whose line this is. It feels like
• 1:20:11
  Speaker 2: I'm stealing it from somebody. Equity crises, bruise, debt crises, maim.
• 1:20:19
  Speaker 2: And I've been unable to track that down and it
• 1:20:21
  Speaker 2: doesn't sound like something I would have written. But anytime
• 1:20:24
  Speaker 2: I use something from someone, I'm usually very, very fastidious
• 1:20:29
  Speaker 2: about making sure the quote is attributed correctly. But it's just,
• 1:20:35
  Speaker 2: reminds us of leverage kills. Look what's going on in
• 1:20:40
  Speaker 2: Korea with their 3x and 5x funds. As those unwind, man,
• 1:20:45
  Speaker 2: they've had a great run and they've given a ton
• 1:20:48
  Speaker 2: of it back because of the leverage. Bill, I could
• 1:20:51
  Speaker 2: talk to you for two more hours. Thank you for
• 1:20:54
  Speaker 2: being so generous with your time. This has been utterly fascinating.
• 1:20:59
  Speaker 2: We have been speaking with Bill McNabb, former chairman and
• 1:21:03
  Speaker 2: CEO of the Vanguard Group, board member at IBM and UnitedHealth,
• 1:21:08
  Speaker 2: senior advisor to Venrock, as well as board member and
• 1:21:12
  Speaker 2: advisor to so many startups. If you enjoy this conversation, well,
• 1:21:17
  Speaker 2: check out any of the 654 we've done over the
• 1:21:20
  Speaker 2: past 12 years. You can find those at Apple Podcasts, Spotify, YouTube, Bloomberg,
• 1:21:28
  Speaker 2: wherever you get your favorite podcasts from. I would be
• 1:21:32
  Speaker 2: remiss if I didn't thank the crack team that helps
• 1:21:34
  Speaker 2: with these conversations together each week. My audio engineer is
• 1:21:39
  Speaker 2: Alexis Noriega. Anna Luke is my producer. Sean Russo is
• 1:21:43
  Speaker 2: my researcher. I'm Barry Ritholtz. You've been listening to Masters
• 1:21:48
  Speaker 2: in Business on Bloomberg Radio.