Vanguard is an anomaly in the investment world. Can it stay that way?

After the death of its founder, the index fund giant is beginning to move away from what made it different

A few years ago, my colleague Ryan Cooper admitted that he doesn't have a dime invested in the stock market. "Much of that can surely be chalked up to laziness and incompetence on my part," he wrote. "But I think it also has to do with how Wall Street malfeasance, vast inequality, and the complexity of the financial system combine to create an enormous psychological barrier ... the whole ordeal just feels like a giant grift that taints your soul."

My guess is that John Bogle, the founder of the investment giant Vanguard, would've sympathized. So do I. But I actually do have some money socked away in stocks. And the reason is that one time my father told me about Vanguard.

Begun in 1975, Vanguard is an investment firm that specializes in index funds with minimal fees. Bogle himself was a hard-nosed skeptic of Wall Street's investor culture: he thought most investment advisers were bilking customers with fees and riddled with conflicts of interest, and that people claiming they could beat the market were basically snake oil salesmen. Unfortunately, Bogle stepped down as CEO of Vanguard in 1996, left the company entirely in 1999, and died in 2019. And it's not clear whether the company will continue to walk the narrow path its founder laid down.

To see why Vanguard has stood out for so long among a sea of Wall Street hucksters, you need to understand two things.

The first is the index fund. Most investment occurs through mutual funds — basically big piles of money lumped together from many, many people looking to save and build their portfolios, and managed by one firm. But traditionally, that money pile was "actively managed," meaning there was a conscious strategy behind which companies and assets the money was invested in. The managers at the investment firm would poke through the economy, trying to find the hottest companies and best deals to dump all that money into. And, of course, they charged the firm's customers exorbitant fees for that service.

What Bogle realized back in the 1970s was that this was all just useless extraction: If you put those giant pools of money on autopilot, you'd get the same returns, but at way less cost to the customer. That was the index fund, which just tracks a stock index — like, say, the S&P 500 — and allocates its money automatically, according to which company is up or down in the index.

Philosophically, it was a rejection of the whole idea that those self-important money managers were actually doing the job capitalists are supposed to do; namely, proactively directing resources to their best use. Indeed, follow the logic of the index fund's success to its logical conclusion, and it leaves you wondering if American capitalism actually needs shareholders or the legalized gambling of financial markets at all. A sovereign wealth fund paying out a universal dividend, for example, would be something close to an index fund for every person in the entire country.

At any rate, the innovation known as "Bogle's Folly" worked. Index funds today direct roughly a third of all money managed by investment firms. Other companies keep crying uncle and adopting the same model, as they realize they just can't compete with the combination of good returns and minimal fees.

The other thing to understand is Vanguard's ownership structure. Most investment firms are owned by wealthy individuals or by other big financial firms further up the food chain. They're the shareholders, and they cast the votes that direct the investment firm's business decisions. Which means the investment firm doesn't just manage their giant pool of money in a way to get the best results for customers; it manages that pool with an eye to extract an extra profit for shareholders on top. Bogle, on the other hand, designed Vanguard as a co-operative: Its customers are its shareholders. (Full disclosure: I rely on Vanguard for the vast majority of my investments, and pretty much all in index funds, so that technically makes me a shareholder too, albeit a very insignificant one. Like Ryan, I'm not wired for this stuff.)

But drawing its shareholders from its customer population means Vanguard's internal incentives differ from other investment firms: There's no separate class of people it's trying to generate separate surplus profits for. Instead, Vanguard can just forego that money and plow it back into lower fee structures.

You could see the results even in Bogle's own fortune: While $80 million is a gargantuan amount to most people, it's peanuts compared to the vast sums you'd usually expect someone to make after spending decades leading an investment firm that now manages almost $6 trillion.

There are limits to what this democratic ethos means in the grand scheme: Only half of Americans own stocks, and 84 percent of all stocks are held by just 10 percent of stock owners. Vanguard's "everyman" approach to investment is only relevant to a privileged population. But that unusual ownership structure does mean there's no material incentive for Vanguard's employees and advisers to sell its customers on fancy assets or newfangled deals, which arguably has a deeper impact on the firm's whole institutional culture. My father felt Vanguard was one of the few investment firms he'd ever relied on that wasn't out to screw him. In my own (admittedly very limited) interactions with Vanguard's people, they've been refreshingly free of cant or sales pitches. I tell them my retirement or savings goals, they point me to a handful of index funds, and that's it.

Unlike the index fund, unfortunately, Vanguard's existence as a customer-owned co-operative is not likely to spread. If anything, it may be something the social and economic pressures of the industry force Vanguard to abandon. Bogle was "a public servant masquerading as a businessman," as one of his fans put it. But that sort of discipline and self-denial comes with costs, as Bogle's (relatively) modest fortune shows. There was always tension between him and the people who rose through Vanguard to take it over once he departed. Bogle's out of the picture, but the eternal temptation to make bigger money by being a bit more extractive or exploitative towards the common investment customer who's just looking to save for retirement still looms.

Vanguard has begun making overtures to private equity firms — the practitioners par excellence of modern vulture capitalism — in the hope to bring them on as customers. And the old tradition of "active management" is playing a larger role in Vanguard's offering of products and services again. Bigger institutional investors have also managed to push a bit into Vanguard's ownership structure, and now control a modest slice of the company's overall votes.

To some extent, Vanguard's been a victim of its own success. It's grown enormously in recent years to oversee that aforementioned $6 trillion, and that's brought huge logistical challenges for the firm's internal infrastructure, just in terms of maintaining a website and a team of employees that can respond promptly and effectively to all those customers' requests to move money around. That, in turn, has hurt the quality of the customer service Vanguard's been known for.

It's a dreary lesson that, in the modern U.S. economy, running an investment company with the modest meat-and-potatoes goal of providing a quality service for low cost requires an unusual steely resolve. But it would be a shame if Vanguard evolved to be just like its rivals. Not only did the company show that investment and financial advice are professions that can be done more or less honorably; the success of Vanguard and Bogle's Folly should make us, the common people of America, question whether we need the distant overlords of Wall Street directing our collective economic efforts at all.


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