Acquired
02:51:40 · Ben Gilbert, David Rosenthal
[02:51:40] S0: Right. And to put a finer point on obviously superior, it was with Vanguard undercutting them on price and being structurally incentivized by their shareholders to do so. Yep. [02:51:52] S1: Yep. And we kind of had to change it here as we went through the research of, oh, actually, Fidelity and BlackRock are doing so well. Is the question actually flipped that Vanguard's model is holding it back? I don't exactly know the answer, but what I will tell you to bring us to today here is that twenty four months ago, in May 2024, Vanguard made another big CEO announcement that they were bringing on the first outside CEO in the firm's entire fifty year history, Saleem Ramji from BlackRock where he was, until that point in time, head of the iShares division. So that really says a lot right there. And the question is, can he fix the challenges that Vanguard is facing right now? [02:52:45] S0: And and to itemize those, it's what? Customer service, technology. [02:52:50] S1: And this situation where they found themselves that because of ETFs, their competitors or, quote, unquote, competitors can access their funds easily and in sort of a open garden on their own platforms where they will then profit from the customer relationships with those fund holders.
02:52:50 · David Rosenthal, Ben Gilbert
[02:52:50] S1: And this situation where they found themselves that because of ETFs, their competitors or, quote, unquote, competitors can access their funds easily and in sort of a open garden on their own platforms where they will then profit from the customer relationships with those fund holders. [02:53:11] S0: Yeah. In in in in other ways. See, I don't view that as a problem. I think, like, if you're Vanguard, you're delighted to get the business to have people buying Vanguard funds on Fidelity. But there is a vulnerability of you actually don't have a relationship with those customers, but and they have a relationship with with Fidelity. [02:53:28] S1: Yep. And they can easily trade in and out of your funds whenever they want, and their advisers on those other platforms might one day advise them to. [02:53:36] S0: Yep. Gee. Wouldn't it be smart to have a giant advisory business of your own to build the direct relationship with those customers? [02:53:44] S1: Right. So, yeah, what does Saleem do when he comes in?
02:53:44 · David Rosenthal, Ben Gilbert
[02:53:44] S1: Right. So, yeah, what does Saleem do when he comes in? [02:53:48] S0: Well, I think it's some of these things we've been talking expand the advisory business. In addition to that, expand fixed income, which we haven't talked about in a while. Try and expand into retirement, where, obviously, Fidelity has really knocked it out of the park. He's talked on podcasts about making deeper technology investments and improving the client experience. There is this interesting question, which is that they haven't really had any new innovations in a while, call it a decade, that have been really meaningful to the business and that they've continued to scale. They did buy a direct indexing platform called JustInvest, but afterwards haven't done that much with it. Similarly, the personal adviser services grew really fast at launch and then the in the years afterwards. But since COVID, I don't think [02:54:33] S1: They have been mostly flat. [02:54:35] S0: Yeah. Or at least they haven't been putting out any press releases talking about how big it is getting. One interesting one that I was surprised to see is an expansion into private equity. [02:54:45] S1: Yeah. Yeah. That was surprising.
02:54:45 · David Rosenthal, Ben Gilbert
[02:54:45] S1: Yeah. Yeah. That was surprising. [02:54:48] S0: So kinda before talking about why they're doing it, it is worth calling out this crazy thing, which is for public equities and for bond funds, prices have seen massive compression thanks to Vanguard, where you're seeing they used to charge one and a half, two percent fifty, sixty years ago, and now you are seeing the Vanguard effect. You know? Seven basis points at Vanguard and 40 basis points for the rest of the industry. Venture and private equity is two and twenty or often even higher. I've seen Right. Plenty of higher fee structures than that also. [02:55:23] S1: Right. Not only is it 2% assets under management fee to the fund manager every year, There's also a performance fee on top of that in Right. [02:55:32] S0: In the form of carry. So, David, you and I are in this world. We've been venture investors in the past. We do venture investing now. What is your take on structurally why the Vanguard effect has not come to venture capital and private equity? [02:55:46] S1: Yes. I used to think about this a lot, and now I think the answer is just quite simple. Venture capital and private equity is an access business. Yeah. And it's not like you can just call up your broker and say, hey. I want some shares of Anthropic today and execute an order. Like, you need to pay for access, and that's what venture capital is doing, and that's what private equity is doing.
02:55:46 · David Rosenthal, Ben Gilbert
[02:55:46] S1: Yes. I used to think about this a lot, and now I think the answer is just quite simple. Venture capital and private equity is an access business. Yeah. And it's not like you can just call up your broker and say, hey. I want some shares of Anthropic today and execute an order. Like, you need to pay for access, and that's what venture capital is doing, and that's what private equity is doing. [02:56:08] S0: In private markets, the assets have to pick you back. Yes. But in the public markets, they do not. Yes. And in venture capital, there is this chance of extreme outperformance in a power law way for the very best funds, and investors actually are willing to tolerate fees for that chance at outperformance. Yep. The other thing is you really do need a crazy person like Jack Bogle that is interested enough in capitalism to spend their life in the world of investing, but not capitalist enough to want to benefit from it in any way, which is like this incredibly rare, rare person. And Jack didn't exist in this world at all. I mean, he only was in the world of mutual funds and basically had no contact with the sort of venture and and private equity worlds. [02:56:53] S1: Yeah. There hasn't been a Jack Bogle in the private asset world of VC and private equity, and there hasn't been another Jack Bogle in the public asset world either. He is one of one.
02:56:53 · David Rosenthal, Ben Gilbert
[02:56:53] S1: Yeah. There hasn't been a Jack Bogle in the private asset world of VC and private equity, and there hasn't been another Jack Bogle in the public asset world either. He is one of one. [02:57:03] S0: There hasn't been another Jack Bogle in any industry. I mean, that's the interesting thing to call out here is to spoil one of my giant endnotes of this episode, my quintessence. There's no reason why mutual ownership of a corporation needs to be strictly in the asset management business. I mean Yeah. Why if this is a better form of capitalism, which I think, like, I'm excited about this model. I'm I'm fascinated by it. It seems like this, like, really beautiful, elegant structure that provides a lot of durability. Why aren't we seeing it in retail and grocery and technology? And why aren't the customers always the owners of the company? Or at least why isn't there literally any other examples other than REI? REI. An Algorand. But that's probably the biggest example. And then a handful of small grocery stores, and the other scale players are probably just insurance companies or banks. [02:58:00] S1: Yeah. Yeah. [02:58:00] S0: But, like, why why isn't the economy littered with this? [02:58:03] S1: Let's table this question for analysis. But to keep it on Saleem and Vanguard today Yes. They're entering private assets for the first time.