Бывший глава Vanguard Билл Макнабб призвал регуляторов ужесточить контроль за финансовыми отчетностями и ограничить использование кредитного плеча

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