Acquired
01:57:02 · David Rosenthal, Ben Gilbert
[01:57:02] S1: still on the board, but he's no longer CEO. The transition has happened, and the company is transitioning to this new phase. Jack, I think, gets super frustrated. He wants to be back in the saddle. And the way this manifests is he, at the board level, starts kinda becoming a curmudgeon and disagrees with all the new initiatives, all the new things that Brennan and the new management team wanna do to capture their opportunity and insulate against competitors. So these are things like launching sector specific index funds or international funds and investing more there or investing more in marketing. You know, basically growing the firm and offering the clients what they want. In Jack's mind, this is starting to be a perversion of the mission. Meanwhile, management is like, hey. Our customers want this, and our competitors are offering it, so we should do it. [01:58:01] S0: This is classically the divide between the founder of a company and the group of people that will take it not just from one to two, but from one to a 100. I mean, the clean simplicity and the mission and the focus and the narrowness of the product and this one cool trick that they have is the thing that got them there. And classically, you need people who are willing to be much more flexible but with the same culture, the same values, the same mission than the founder was. And you see this in the numbers. 99% of Vanguard's AUM came after Jack stepped down.
01:58:01 · Ben Gilbert, David Rosenthal
[01:58:01] S0: This is classically the divide between the founder of a company and the group of people that will take it not just from one to two, but from one to a 100. I mean, the clean simplicity and the mission and the focus and the narrowness of the product and this one cool trick that they have is the thing that got them there. And classically, you need people who are willing to be much more flexible but with the same culture, the same values, the same mission than the founder was. And you see this in the numbers. 99% of Vanguard's AUM came after Jack stepped down. [01:58:40] S1: Yep. Yep. And you hit on a really, really important point to stress there. The same values, the same mission. It's not like Brennan and the new management wanna all of a sudden start generating tons of excess profits or take Vanguard public or, you know, do anything crazy like that. No. No. They they're true believers in the mission as well. They just wanna serve clients and meet them where they're at now as the world is moving on. [01:59:06] S0: And there are big things here like employee retention. If, as a company, you're trying to run at cost and your competitors are in an industry where you can pay people obscene amounts of money if they are high performers. [01:59:20] S1: And Right.
01:59:20 · David Rosenthal, Ben Gilbert
[01:59:20] S1: And Right. [01:59:20] S0: I mean, you you need some kind of way of dealing with this. And Jack Brennan, this sort of falls in his lap. One of the things he does early in his tenure is to create a employee partnership plan to try to incentivize the the workforce and kinda deal with the structural trade off of how do you get high performers who could get paid way more somewhere else. Or very similarly, if you aren't generating very much income, how do you make future investments in things like r and d as people's expectations for customer service and technology start becoming higher and higher and higher. [01:59:54] S1: Right. The Internet is becoming a thing now. [01:59:56] S0: Right. You you you you need to start investing. So that's the sort of things that fall in Brennan's lap [02:00:01] S1: Yeah. [02:00:01] S0: That he has to do to take the company forward. [02:00:03] S1: And they end up at loggerheads with Jack on the board. So all of this comes to an ultimate head and blow up in 1999 over exchange traded funds. Yep. The most important new thing in the industry. [02:00:20] S0: I am a Vanguard customer, and I think a 100% of the way that I am a customer is through their ETFs, not through their mutual fund products. And the mutual funds are everything we've talked about up until this point.
02:00:20 · Ben Gilbert, David Rosenthal
[02:00:20] S0: I am a Vanguard customer, and I think a 100% of the way that I am a customer is through their ETFs, not through their mutual fund products. And the mutual funds are everything we've talked about up until this point. [02:00:32] S1: Yep. Yep. So, Jack, had a real point of view on ETFs. And in fact, he had the opportunity to launch ETFs. So back in 1992, a man named Nathan Most had come to see Jack at Vanguard. Nathan was the VP of new products at the American Stock Exchange, and he had had the idea to create exchange traded funds as a new product, a new trading vehicle that would allow effectively shares, quote, unquote, of mutual funds to trade on stock markets in the same way as individual stocks, a stock exchange traded mutual fund, an ETF. And he thinks, of course, naturally, the very best fund to partner to launch this idea with would be the newly, you know, kinda crowned jewel of the mutual fund industry, the Vanguard five 100 index fund. And you [02:01:34] S0: might think Bogle's gonna love this. Like, what is an ETF? It's an even easier way to buy into something that looks basically like an index fund. And if you're trying to go direct to your customers the way that Vanguard does Yeah. Without the sales loads and everything, then great. They should be able to buy it right on an exchange.
02:01:34 · Ben Gilbert, David Rosenthal
[02:01:34] S0: might think Bogle's gonna love this. Like, what is an ETF? It's an even easier way to buy into something that looks basically like an index fund. And if you're trying to go direct to your customers the way that Vanguard does Yeah. Without the sales loads and everything, then great. They should be able to buy it right on an exchange. [02:01:52] S1: Easier distribution available to more of the investing public. What's not to love? I mean, that was that was Nathan's view. He was a real idealist about this. Yep. Hey. We're gonna vastly expand the distribution reach and the target audience for mutual funds and allow anybody who can place a trade on a brokerage to buy into a mutual fund, and he was absolutely right. [02:02:16] S0: And there's some other structural benefits too. There's the idea that you're not affected by other people in the fund. So if someone else decides to sell a bunch of their shares, I don't end up getting a a big tax hit from [02:02:28] S1: it. Yep. [02:02:29] S0: Then, of course, there's the you actually do know the price that you are getting because since it's traded on an exchange, when I decide to make an investment in that fund, I buy it right here, right now at the market price. I'm not waiting till the end of the day to figure out the mutual fund is gonna be priced at. So ETFs have lots of great things about them. [02:02:47] S1: Lots of great attributes. Jack hates this idea. He absolutely hates it, and he basically tells Nathan Most to get lost.
02:02:47 · David Rosenthal, Ben Gilbert
[02:02:47] S1: Lots of great attributes. Jack hates this idea. He absolutely hates it, and he basically tells Nathan Most to get lost. [02:02:57] S0: And why does he hate it? He hates it because it's exchange traded. Yep. He thinks, well, that for that very reason that I love it, that you know the exact price that you're buying it, it means you could trade in and out of it all day. You could do the worst possible sin of investing, which is incur a bunch of trading costs, speculate on it, not be a long term owner, and just try to do intraday arbitrage. [02:03:21] S1: Yep. [02:03:21] S0: And that particular thing that he thinks that's gonna cause all of these behavioral issues, even though the intrinsic product has all these great characteristics, he thinks the temptation for people to do that is so bad that the product shouldn't exist. [02:03:37] S1: Well, I think there's two other related things that he's really worried about beyond just that temptation in and of itself. One is that the brokerage platforms are gonna incentivize trading because this is how they're gonna profit from mutual funds. [02:03:53] S0: Because at this point in time, Robinhood didn't exist yet. Fees hadn't dropped to zero on transactions, so you actually were paying very meaningful amounts. For in recent memory, it was single dollar, but it used to be, like, 50 plus dollars to place a trade on an exchange.