(Bloomberg) -- Jack Bogle is gone. But head west from Philadelphia, toward the leafy borough of Malvern, Pennsylvania, and turn onto the Vanguard Group campus. There’s old Jack, cast in bronze, surveying his singular creation: Vanguard, the mutual-fund giant that changed everything.
At Vanguard’s headquarters, 117 miles and a world away from Wall Street, Bogle’s figurative heirs are charting new paths for his quirky company, that great popularizer of low-cost index funds.
The changes might seem quintessentially Vanguardian: slow, steady, even a bit boring. But to diehard fans, what’s at stake is the very soul of Vanguard, a colossus that oversaw $8 trillion at the end of February. Only BlackRock Inc. manages more.
Chief Executive Officer Tim Buckley is trying to move beyond parts of the revered founder’s playbook, and rouse the sometimes-sleepy Vanguard.
Courting suspicion from traditionalists, Vanguard is pushing ever deeper into financial advice, known internally as “Engine No. 2” of growth. It’s giving wealthier clients and advisory customers the velvet-rope treatment, in contrast to Bogle’s everyman ethos. With scant notice, it’s quintupled the minimum balance required for one personalized service to $5 million.
“I don’t think Bogle would have done a number of these things,” said John Rekenthaler, vice president of research for Morningstar Inc.
Vanguard’s still gobbling up market share and drew about $300 billion in net flows last year. But some of its greatest strengths -- its outsider status, cautious approach and focus on costs -- come with drawbacks in a changing industry. Some index-fund enthusiasts known as Bogleheads fret the company has veered off the straight and narrow.
A series of big moves have surprised employees and investors. Last year, Vanguard abruptly retreated from much of its business in China. It also slashed a long-standing medical benefit for retirees, provoking such outcry that Buckley reversed course and apologized.
“The way that they chose to communicate the termination of that benefit and the timing they chose was extremely poorly done,” said Katherine Lowe, who worked at Vanguard for more than two decades, through 2020. “Vanguard usually takes the high road.”
Read more: Shock and Tears: Behind Vanguard’s Retreat From China Market
Just this month, three investors filed a class-action lawsuit, saying changes to popular target-date funds saddled thousands of individual customers with “massive” tax bills, all for the benefit of big institutions.
“The ethics came from Jack Bogle, and I’m a little concerned they’re going in different directions,” said Allan Roth, founder of Colorado-based financial planning firm Wealth Logic, and a self-described Boglehead.
And then there’s technology, a critical component of Vanguard’s low-cost model. Management’s obsessive focus on costs, as well as the company’s unusual mutual ownership model, are running up against an industry where spending on technology is ever-increasing.
A series of glitches and customer-service errors have infuriated clients. In December, U.S. customers couldn’t access trade confirmations and monthly statements. And that came after high-profile gaffes in 2018 that saw Buckley -- a Vanguard lifer who started as Bogle’s assistant -- vowing to spend $1 billion a year to update the firm’s technology.
Buckley, 52, declined an interview request. Chas Kurtz, a spokesman, said any changes reflect Vanguard’s long history of evolving to meet its clients’ needs.
“Vanguard has been continuously innovating and evolving since Mr. Bogle founded the firm,” Kurtz said in a statement.
Different Vibe
Bogle, who died in 2019 and retired from Vanguard's board two decades earlier, is revered across America. Creating the first retail index fund in the 1970s, he preached that investment managers who claimed they could beat the market were mostly selling snake oil. His vision for so-called passive investing turned out to be one of the biggest financial innovations of the 20th century, saving money for tens of millions of investors and retirees.
On Vanguard’s quiet, redbrick campus in suburban Philadelphia, you won’t find many aspiring masters of the universe along the exercise trails or hitting the salad bar in the “galley,” one of many nautical names Vanguard uses for its campus and staff -- “crew” -- with summer-camp sincerity. (Bogle named the firm for Horatio Nelson's flagship at the Battle of the Nile in 1798, and for its leadership connotations.)
The culture is partly maintained by hiring employees from local colleges and promoting from within. Vanguard pays about one-third less than the competition, according to a person familiar with its compensation practices.
Kurtz, the Vanguard spokesman, said the firm offers “competitive, comprehensive, and best-in-class total rewards.”
Lower base pay can be offset by its phantom equity program, as well as an unusually generous 401(k) plan that contributes the equivalent of 10% of an employee’s salary to their retirement account.
“No one goes to Wall Street to turn over future profits to the customers,” said Eric Balchunas, an analyst at Bloomberg Intelligence and author of “The Bogle Effect,” a forthcoming book about Bogle's life and influence -- underscoring the difference between the priorities at Vanguard and its competitors.
Vanguard is still pulling in astonishing sums, and increased its market share from 17% to 26% from 2012 through 2021, according to Morningstar data.
But as it’s amassed trillions, its net asset growth rate has slowed, trending lower in the years since 2018.
Vanguard has been so successful at spreading its gospel of low-cost index funds that it’s been adopted at top-tier rivals, including BlackRock, Charles Schwab Corp. and Fidelity Investments.
All of which helps explain why Buckley is making such an effort with the burgeoning business of financial advice.
New Lines
Personal Advisor Services, as the business is known, has attracted $275 billion in assets since launching in 2015.
It charges fees equal to 0.3% of a customer’s assets, or about $150 a year for the minimum $50,000 portfolio. At Fidelity, advisory fees for similar services are 0.5% or more.
It’s a high-stakes decision. Advisory is supposed to help drive growth now that index funds and fee-cutting are ubiquitous. Vanguard also opened a private equity offering, run with HarbourVest Partners, to qualified individuals -- entering a higher-fee realm than the cheap, accessible index arena. Kurtz called the pact “a continuation of Vanguard’s enduring commitment to broadening access to investment strategies.”
One initiative that captures Vanguard’s challenges was known as the Innovation Studio. Opened in 2017 with Bogle’s blessing, it was supposed to find ways to reach new kinds of customers. After a series of projects that failed to flourish, the studio turned to direct indexing, a growing trend among the high-net-worth set that involves buying the stocks of an index, rather than owning a mutual fund or ETF.
Vanguard set up an outpost for the studio in Philadelphia, complete with the requisite start-up-style ping-pong table, exposed duct work, and a blackboard chalked with phrases such as “Let’s Make Something Awesome.” But the team was instructed not to tell potential aquirees they were calling from Vanguard, frustrating and confusing some staff, according to a person familiar with the matter. Instead, they said they represented a Philadelphia-based innovation company, and rarely had their calls returned. BlackRock, Morgan Stanley and JPMorgan Chase & Co. all snapped up their own direct index businesses before Vanguard moved in.
Eventually, in 2021 Vanguard acquired Just Invest -- its first acquisition ever. The Innovation Studio shuttered the same year. Kurtz noted it was part of Vanguard's corporate strategy group, which still exists.
Service Woes
To some extent, the Innovation Studio episode encapsulates a uniquely Vanguard predicament: a history of revolutionary change coupled with an aversion to being a first mover. Software engineers were left wringing their hands, according to current and former employees.
To fill gaps in technology staffing, Vanguard has come to rely heavily on outside consultants and contractors. McKinsey & Co., for instance, was hired to improve the technology department’s efficiency, and generated a project called “New Ways of Working,” or NWOW, which was supposed to make information flow efficiently. Engineers joked it was basically the systems that other companies had adopted long ago as a matter of routine, said one of the people.
Customer service seems to be suffering. A site that gathers feedback, Customer Service Scoreboard, showed Vanguard’s proportion of customer service complaints exceeded Schwab’s and Fidelity’s.
Roth, of Wealth Logic, said that trying to get his name removed from his grown son’s Vanguard account was a challenge. He had one at Fidelity, too, and that was no problem.
“Fidelity was done in 20 minutes, with five minutes of my time,” Roth said. “With Vanguard, it took well over a month, with many hours of my time.”
“We take our clients’ feedback seriously, aspire to deliver an exceptional experience, and are making significant capital investments to get there,” Vanguard’s Kurtz said.
Other Bogleheads are also complaining. Rick Ferri, a longstanding adherent, says discovering Vanguard index funds was “like the fog had lifted and the sun shined through.”
But when it comes to calling Vanguard, “I try not to,” he said. “I have to wait on hold. And wait and wait and wait.”
--With assistance from Silla Brush and Dawn Lim.
To contact the author of this story:
Annie Massa in New York at [email protected]