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The Long View
Salim Ramji: The Industry Uses Complexity As a Mask to Charge More
00:31:02
One year into his tenure, the Vanguard CEO reflects on the push to get investors into private securities, the future of advice at Vanguard, and whether the firm has addressed its customer service and technology issues.
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- [00:00]
Unknown Speaker
Please stay tuned for important disclosure information at the conclusion of this episode.
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Christine Benz
Hi, and welcome to the Longview Podcast. I'm Christine Benz, director of Personal Finance and Retirement Planning for Morningstar.
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Dan Lefkovitz
And I'm Dan Lefkovitz, strategist for Morningstar Indexes.
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Christine Benz
We're taping this podcast at the Morningstar Investment Conference, where we're delighted to be joined by Vanguard CEO Saleem Ramji, who joined Vanguard just about a year ago. Prior to joining Vanguard, Saleem was a senior leader at BlackRock, where his most recent position was as global head of iShares and index investing. Before that, he was a senior partner at McKinsey and Company. Saleem started his career as a lawyer at Clifford Chance in London and Hong Kong. Saleem Ramji, welcome to the Longview.
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Saleem Ramji
Well, thanks for having me here. It's great to be in Chicago, and it's great to be at the Morningstar Conference.
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Christine Benz
Well, we're thrilled to have you here. So you're the first outsider to have helmed Vanguard. Wondering if you can talk about what you see as kind of the main challenges of coming in as an outsider and what you see as the main opportunities of maybe that fresh perspective.
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Saleem Ramji
Yeah, it's a. What I would say is that Vancouver has been a really welcoming place. And so when I first kind of arrived on campus back in May of last year, you know, I was wondering what. I'm sure the crew were wondering about me at the same time. And. And, you know, what I've really tried to focus on for my first year is just spending a lot of time with our crew and also spending a lot of time with our clients. And, you know, Vanguard's been an extremely successful company in delivering kind of the right outcomes for our clients for the 49 years before I arrived at the scene. And so I've been spending a lot of time just really understanding why and what are the reasons kind of behind that and what's made the company special so that we can maintain and preserve all of those aspects for the next 10 years, the next 20 years, and kind of well beyond that, and at the same time, I think that, you know, to your question, there's a lot of opportunity because if you go back to our kind of mission around helping investors achieve investment success, that there are so many more things that we can do to help make that happen. I can see opportunities in fixed income, in helping people save, but also, perhaps most fundamentally, in just being able to provide advice in a. In a much more accessible way than might otherwise be possible.
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Dan Lefkovitz
So it sounds like You've spent a lot of time getting to know the crew and learning the culture. What would you say, as you're a year and a month in, are your biggest achievements? What's top of the to do list?
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Saleem Ramji
Oh, what I would say is what part of my kind of getting to know and understand the crew and the culture, and I'm not sure I'd call it an achievement, but. But I'm at least proud of it, which is just really. I think I have a much deeper and better appreciation for some of the stuff that I talked to Christine about. The thing that surprised me the most is, you know, I've always kind of understood Vanguard to be a very mission driven, purpose driven company. We're owned by our clients. But I will say I probably entered with a bit of skepticism about is it really true? I've been working in and around financial services for like, 25 plus years, and, you know, we've all seen a lot of companies that espouse a purpose, but perhaps it dilutes over time. You know, it's been 30 years since Jack Bogle was the CEO of the company. It's been six years since he passed. And I think one of the really amazing achievements of Vanguard, at least for someone who's newly on the inside, is that sense of purpose, that sense of culture is very rich, is very alive. And so just understanding the idealism of the place, just understanding why people come to work, understanding what people are really excited about. You know, it's a. We announced, as you know, because Morningstar had talked about it, but back in February, we announced kind of the largest cuts in our history. Like, in one part that was satisfying, another part. It's the 2000th time someone at Vanguard has announced a reduction in price. So there's nothing unusual, if you will, about that beyond the size and magnitude. What was unusual for me was just to understand what a joyous day it was on campus. Our crew were really excited about it. Our board of directors were really excited about it. All of us in the senior team were really excited about it. And that's a really unusual thing. Usually people at a company don't get super excited when you're cutting fees, but for us, it was a moment much like, you know, every 2,000 times before we'd done it. But it was a real cultural moment, a real affirmation of, like, this is what you get for being owned by clients, and this is the clarity, at least in terms of the mission. And that was a, you know, it was a. It was a proud moment, if you will. And it was great to just understand that not just in the, in the fee cut, but in the cultural affinity with doing the right thing and being able to kind of benefit the clients as owners as well as his investors.
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Christine Benz
So, sticking with culture, what have been the biggest culture shocks for you coming from blackrock and moving to Vanguard? What do you perceive as the major differences?
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Saleem Ramji
Yeah, it's hard to describe because I think that Vanguard is such an unusual firm. I'd worked at another firm, I'd advised many firms in my prior lives, and, and the sense of culture is different here. And I think some of it goes back to the original genius of the design, which is we're owned by our clients. And I think what that gives us, which is different than any private firm or different than any public firm, is a singularity between the client and the shareholder. And as a result, the culture becomes really reinforcing in a way that we celebrate fake us. We don't follow trends, we follow what are things that will enable clients to achieve investment success or enable clients to have an advocate kind of on their side. And so, so there are a lot of things that we do at Vanguard which are purposefully different. And, and it really struck me not just in the ethos and then, you know, the archives of Vogel, which, you know, now had a lot of access to, and there's some marvelous old memos and old speeches about, but just in the day to day in terms of how we think about what products should we launch, what shouldn't we do, what investments do we need to make behind things like technology, how do we price certain services? And it's very unusual. I think you can go back to the structure, you can see the reinforcing in the culture, but I think it's our client ownership coupled with a lot of the cultural ethos and a lot of the things that we've been doing for many years that have really reinforced the difference. So I think one of the things that makes Vanguard special is I haven't encountered any company like this, and it makes for just a really kind of special and unusual place. But I think that's part of what's been true not just this year, but for decades.
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Dan Lefkovitz
The question that's probably top of mind for a lot of our listeners, where do things stand with regard to the customer service challenges that Vanguard has been experiencing?
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Saleem Ramji
No, it's a good question. We have been doing for the past three years, two years before I started a whole series of investments, particularly in technology, and particularly in our technology stack I think we're turning the corner, but this isn't a destination, this is a constant journey. What the technology changes have allowed us to do and now virtually, I think it's like 90 plus percent of our personal investor platform is cloud native. And that was really hard, laborious, costly work to make that happen. But we think we now have the most modern kind of infrastructure stack in the industry. What it allows us to do, beyond all the kind of high levels of resilience kind of that a platform like that now has, is be able to make improvements on a lot of the front end design and a lot of the front end user experience. And so we've already been doing that over the past six months. Back in March we started to see some good early signs of progress. J.D. powers ranked us number one for the first time in a while in terms of our client experience for DIY investors. But it also then gives us the ability to keep innovating, making the front end kind of web or mobile applications better, more intuitive, more customized. So maybe different if you're a kind of wealth management client with some complexity versus if you're a first time investor. And what the really exciting part of it is is it gives us some incredible opportunity to then put kind of AI applications on top of that. Because our tech stack is now modernized in a way that just wouldn't have been possible two years ago or three years ago. So it's not that we're declaring victory by any means. We're on a journey. We've been doing it deliberately and methodically. We appreciate all of our clients patience with it, but I think that clients are starting to see some of the results and we're continuing to invest in a major way to make sure we, we continue to distinguish ourselves in a positive way kind of on that front.
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Christine Benz
So you mentioned AI. Can you provide any specific examples of how you're using AI to help clients?
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Saleem Ramji
So we have like many companies, a lot of things in pilot, a lot of different applications, a few dozen around it. The one thing that we just released in April is it's an AI based tool that allows advisors to communicate in a customized way with their clients. So how do you take all of the market views, synthesized views that you might get from Vanguard, you might get from a whole range of firms out there and be able to distill it down into one or two pages, but you customize it to a client, you may be a really confident client, Dan may be anxious and in retirement. Right. I may be a first time investor and just like want to understand what's going on and, and some of these capabilities which we built for our own advisor team, we've now made available to all advisors, including those here at the conference, who are our kind of Vanguard clients within their portfolios. And it's been really, really positive. We've gotten really great feedback, whether it's here at the conference or even just through our interactions with them. And I describe that as a first step of taking what is often complicated, noisy information and making it simple and more personalized. Honestly, Christine, we're holding back on some of the pure client facing, direct client facing applications. They're really good, but we're holding back on them because we want to make sure we're doing it in a responsible kind of way. And so we've worked out any kind of kinks, hallucinations and the like before we do it, but just the application of that I think can be kind of very, very significant for what we do in advice, what we do for first time investors. And honestly it's, it's sort of on mission, if you will, because for a very long time Vanguard has taken the complicated and tried to make it simple and accessible. And I think that the AI applications, whether it's with advisors, whether it's with our direct consumers, you know, I was with a whole group of our workplace clients last night and so just think of the complexity of retirement plans and you know, particularly if companies have merged and wanted to still that we have all those applications at the ready, we have a tech stack that's able to handle it, but we're just working it through ourselves and with kind of clients and others just to make sure we get it right because it's really important we do it responsibly.
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Dan Lefkovitz
Financial advice has been described as Vanguard's engine number two. Curious how you sort of balance, you know, serving investors, empowering them in their own practice versus providing financial advice yourself.
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Saleem Ramji
Yeah, and it was, it was something, you know, if the got the history right, we'd started it out about 10 years ago. And some of the original logic which still applies is that for some clients the key to investment success is advice. And I've come across a number of clients, both that I've met with our advisors or even when I'm listening in on calls, who may have started out as self directed investors, but maybe in retirement they want more help and more advice than they needed in accumulation. Maybe they're thinking about how to enable the next generation, their kids or grandkids to interact kind of with investments. And so they're looking for advice not necessarily for themselves, but for others in their family. And so part of why we, we started that offering 10 years ago was to really enable clients who wanted that service from Vanguard to be able to have access to it rather than having to go somewhere else. And what we're really innovating on beyond kind of that service, and this goes back to AI. You know, we've got a digital advice platform. Since I'm here at Morningstar, it was highly rated by Morningstar and back in September we dropped the minimum account size to $100. So for a hundred dollars you can now get a diversified portfolio of underlying ETFs. You can get a digital advice capability. And the thinking behind that was that everybody should have access to good advice and it shouldn't just be the preserve of the very affluent or the folks that, you know, very high net worth advisors want to serve. And if you think as you look out over the next 10 years, there's going to be fewer advisors and more demand for their services. And so if we're to help more and more people achieve investment success who need advice, we're going to have to do that digitally. And I think we want to take this digital advice capability that's already well regarded by clients, by Morningstar and others, and then embed a lot of AI capabilities into it to make it even more personalized, even more capable than it is today. And I think that's a, you know, beyond the dropping the minimum to a hundred dollars, I think that's the most exciting kind of next development for digital advice is how do you make it kind of much more enabled by AI and, and, and enable clients, whether they have $100, $1,000, $10,000, to be able to interact with it much better.
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Christine Benz
So we want to switch over to discuss investing and I wanted to get your perspective on whether the balance has shifted a little bit too much in the direction of complexity in investor portfolios. There's been a big push to get smaller investors in private investments, whether private equity or credit. I'd like your take on complexity writ large, but also specifically the private markets exposure and how you see that fitting into investor portfolios if you do.
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Saleem Ramji
Yeah, I mean, look, as a general matter, complexity for decades has really been a mask for charging higher fees. And, and I think part of what Vanguard's been about has not just been about low fees, but simplicity. And I think that's going to be a really important feature of Vanguard going forward as well, around being able to keep things simple, to Help clients invest for the first time to help clients continue to invest kind of in a good way for the long term. There will be some segments of clients, you know, perhaps at the very high net worth area for whom some exposure to private markets could make sense. But for us, it still adhere, it still has to adhere to kind of the vanguard principles. It's got to be good quality, it's got to be at a low fee, and it's got to be done in a way which is intelligible and simpler, if you will, than the client could otherwise get. And we're starting to experiment, if you will, around could we provide access to private market investors, to certain segments of client that fit the profile and we'll see kind of how we get in terms of that journey. What we do know is that for the right clients with the right product at the right fee, it can be additive to the overall risk return profile of their portfolio. But there's a lot of work to make sure that those conditions are met. And so that's an area that I'd say we're experimenting and learning about. But I, you know, you ask the question, Christine, across the industry, I think it's going to be some time, like a long time, longer than most people expect before, you know, this really goes mainstream in a big way. And I think a lot of it is not just the complexity in the fees, but just the, the complexity of, of, of consuming kind of the product. Mutual fund is really easy to consume. Now. We've been at it for like 101 years. Right. An ETF is pretty easy to consume. But we're now in our fourth decade of ETFs. And so some of the things that people look at appropriately as democratizing investing like mutual funds and ETFs, these are decades in the making. And, and, and so, you know, any new features, even good features to be able to add often take longer than, than people expect. But that's why we just wanted to start kind of looking and understanding it because done well, I think it can be additive. But there's a lot of work and thinking and research to satisfy the done well in the vanguard way element.
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Dan Lefkovitz
Yeah, crypto is an area where before your arrival, Vanguard kind of drew a line in the sand and refused to add cryptocurrency ETFs to the platform. Yeah, I'm curious how what the decision, decision making framework is like, how you go about, you know, approaching a new sort of asset class or asset.
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Saleem Ramji
Yeah, it was pretty straightforward. And you know, Greg Davis, our CIO and I had talked about it kind of early in my arrival. And at Vanguard, we like things that we like investments that deliver cash flow or have the prospect of delivering cash flow that could be cash, could be bonds, could be equities, could over time, if the circumstances are right, be private markets. We don't like things that don't. We don't have a gold etf, we don't have a silver etf. And so it's a logical extension then as to why we don't have ETFs in other things that don't either deliver cash flow or have the prospect of delivering cash flow. And that's okay. The market's well served. Investors can decide. But we also want to be clear about what our own investing philosophy and our own investing thinking is. And we're okay not being everything to everybody. And there's certain things like either we don't fit our investment philosophy or we don't think, you know, we have particular skill or expertise in. And so that's where I'd put some of those types of kind of ETFs in that bucket.
- [21:00]
Christine Benz
Vanguard has put a big emphasis on active fixed income management in the past couple of years. Can you give us some background on what's driving that interest? And also how do you think about how advisors in their clients should decide whether to go passive with their fixed income exposure or go active? Are there categories where you think active?
- [21:21]
Saleem Ramji
It's a great. That's a great question. It's a great question. And, you know, one of the things, honestly, that surprised me a year ago, and I sat down with Sarah Devereaux, our, our fixed income cio, and, and I'd gone through kind of the performance numbers, the investment process and the like, and we're really good at it. We've actually been doing it for 40 years. Bogle started our fixed income kind of area. 98% of our active fixed income today is in the lowest price decile. 91% of our active fixed income outperforms its peers over the past decade. Those are two extraordinary numbers, but they're highly related. Right. And, and I think the opportunity is first and foremost kind of to help clients build the right fixed income exposure in their portfolio. Some of that is indexed and some of that is active. But I think, as those numbers speak to, they really are empirical proof of the cost matters hypothesis that you don't have to trade off quality for price. In fact, you know, as Bogle said, investing you get what you don't pay for. And, and I think the thing that's really exciting for us is the ability to deliver active fixed income at a quarter of the fee that what the industry charges. We also are really proud of our index fixed income capabilities, which are, you know, even cheaper than our active fixed income capabilities. But there are segments of the fixed income market where active management at a, at the right fee can work well. Munis are a really great example of where empirically kind of in our own portfolios that's been proven to be true. But it also goes to kind of our approach to risk management, which is that if you've got a low fee hurdle to overcome, you can be much more disciplined about security selection, you can be much more disciplined about the alpha generating investments that you make. And you're not having to take big swings on where you think rates are going to be or big swings on certain credits or certain exposures. You're able to be disciplined and methodical because you know, you don't have to overcome a huge fee barrier to be able to deliver outperformance. And I think that's what we've been doing certainly for the past 10 years. I haven't looked at the 40 year record, but I'm sure it also kind of speaks to it. But what it really kind of gets to Christine, is I think the whole discussion of active and index is often a misnomer. It's a discussion around price and, and if we can provide high quality active management at a low fee and high quality index management at a low fee. What we're doing for financial advisors or individual investors is providing them the choice that, that, that they can use to be able to build a portfolio without having to suffer kind of some of the fees that, that they've had to endure, particularly in active fixed income.
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Dan Lefkovitz
How is Vanguard helping investors navigate the transition from accumulation, building wealth to the accumulation, you know, spending, giving and leaving a legacy?
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Saleem Ramji
I think, I think it was Bill Sharp who said that it was the most intractable problem in finance about how to think about the decumulation. And, and we've got tools that we give for self directed investors. We've got tools we give to our advisors to help kind of with what's the right way to accumulate. It's still a really hard problem. One of the hardest problems though is just helping clients get over the anxiety kind of around it. I mean honestly, some of the most, both heartbreaking and inspiring calls that I've been on at Vanguard have been clients who are in retirement, who have saved well, who have adhered to all of the vanguard principles over 20, 30 years. And they're just not spending what they should, and they're not living kind of the life in retirement that they should afford. The inspiring part is, and this is often where an advisor comes in because it's hard to do this through a tool that if they have an advisor they trust, if they have confidence that that advisor is looking out for their interest, is a true fiduciary. That advisor can often help them get over the anxiety, can help them understand that it's okay to go on that vacation, it's okay to give, you know, this gift for your grandkids birthday. And it's just, it's a, you can see in many cases the relief on a client's face to know that there's someone they trust saying it's okay. So I think it's a combination. First, it's a really hard thing, and I don't pretend that we've solved it or even the industry solved it, but beyond all the tools and the capabilities and the, the kind of all of those pieces, a lot of what we're helping with is to help clients understand when it's okay when it's not. But, but in many cases it's just helping them enjoy the retirement that many clients have saved and invested for, but just don't quite know if they're spending the right amount. And I think that's, that's really kind of the, the challenge, the opportunity for us, for I think the whole industry, but that's at least how we're approaching it.
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Christine Benz
Our last question we'd like to ask, what are the key things you worry about with respect to Vanguard?
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Saleem Ramji
The things that I want to make sure endure. Right. If it goes back to. The thing that surprised me the most was the sense of culture, the sense of mission. I want to make sure that Whoever's sitting here 10 years from now, 15 years from now, kind of feels that same sense of mission, that same sense of purpose that I felt that people 10 years ago felt that people 20 years ago felt into the future. And, and I think that it's managing the duality of what that is. And there are places where our crew are really excited to evolve and to move into. Could be fixed income, could be more in advice, could be more in savings, just as we've evolved over the years, like in things like ETFs or retirement plans or serving financial advisors who don't work at Vanguard. And I think it's really balancing that duality, if you will. We want to be true to who we are. You know, I talked a lot about kind of my impressions of Vanguard being a special and unique place. Like I want that to continue and there's some things that we're investing to do better in. There's some things that I think that we can continue to make a really big impact to investors in like fixed income or savings. And there's some things that, you know, we at Vanguard and we at the industry, you know, really need to figure out around. How do you help advise people in retirement? And it's how do you do both, right? How do you both continue to evolve, continue to serve investors needs well and how do you still remain true to who we are as a company and as a, as a institution? And that's, it's really sort of managing that duality is always the thing. I'd say that's probably top of mind along with cybersecurity and other kind of things as well. But that's certainly kind of the enduring thing that's at the top of my mind.
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Christine Benz
Well, Saleem, thank you so much for taking time out of your schedule to be with us.
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Saleem Ramji
Yeah, today was great to be here.
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Christine Benz
We really appreciate it.
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Saleem Ramji
Thank you. Thanks.
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Unknown Speaker
This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording and are subject to change without notice. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. And its affiliates, which together we refer to as Morningstar. Morningstar is not affiliated with guests or their business affiliates. Unless otherwise stated. Morningstar does not guarantee the accuracy or the completeness of the data presented herein. This recording is for informational purposes only and the information, data analysis or opinion it includes or their use should not be considered investment or tax advice and therefore is not an offer to buy or sell a security. Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analyses or opinions for their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile. Before making any investment decision, please consult a tax and or financial professional for advice specific to your individual circumstances. Sam.