Acquired
00:56:41 · David Rosenthal, Ben Gilbert
[00:56:41] S1: So the next day, after Jack is fired as CEO of the management company, he calls a special meeting of the board of directors of the funds, which is his prerogative as chairman. And he proposes that they, as the board of the funds, vote to, one, do just what you said, Ben, sever the management company relationship with Wellington Management Company, and two, do Jack's, you know, fever dream idea. Mutualize all the management and operations of the funds, hire their own staff, and run it all directly within the fund with no separate external management company or fees. [00:57:21] S0: The phrase that comes to mind here, although it is used completely differently in this context than its original context, is your margin is my opportunity, Jeff Bezos. And in this case, it's not the Amazonian comment, which is, hey. You're charging high margins. I'm gonna charge a lower margin, so I'm gonna get your customers. It's, hey. I'm gonna slash margins as close to zero as possible. I'm gonna mutualize the ownership. [00:57:45] S1: Wait. Actually, to zero. Not as close to zero as possible. There are there's not gonna no longer gonna be any profits. There will still be costs. We will operate at cost, but we will forego all profits.
00:57:45 · David Rosenthal, Ben Gilbert
[00:57:45] S1: Wait. Actually, to zero. Not as close to zero as possible. There are there's not gonna no longer gonna be any profits. There will still be costs. We will operate at cost, but we will forego all profits. [00:57:55] S0: Right. It's effectively like a poison pill. Like, they're not gonna get rich. I'm not gonna get rich. There's these high margins, and I'm gonna use the fact that you're making high margins as my opportunity to come in and say, nobody's gonna make any money. We're gonna shift it all to this new organization that I'm gonna create, and nobody's making anything. [00:58:13] S1: Yep. So how do the fund board of directors react to this? Perhaps not quite as negatively as the management company partners and board of directors, but they're still pretty shocked. They're like, wow. Okay, Jack. You know, we've heard you talk about this before. Obviously, we're in an acute situation here. [00:58:38] S0: And you're kinda conflicted, buddy. Yeah. [00:58:41] S1: Yeah. [00:58:41] S0: Are you being vindictive maybe? Is there anything motivating? You, really pressing us to take all the profits and slash them to zero and go with your, like, brand new company that you're proposing here? [00:58:53] S1: Yep. But here's the thing. Jack does have a very good point, especially to the directors of the fund whose fiduciary duty is to do what's in the best interest of the fund holders. What he's proposing is pretty obviously in the best interest of the fund holders.
00:58:53 · David Rosenthal, Ben Gilbert
[00:58:53] S1: Yep. But here's the thing. Jack does have a very good point, especially to the directors of the fund whose fiduciary duty is to do what's in the best interest of the fund holders. What he's proposing is pretty obviously in the best interest of the fund holders. [00:59:10] S0: Right. He's making the pitch to sort of a non conflicted group. The the board of the funds theoretically is only looking after the investors in the funds and not the shareholders of the management company. Indeed. [00:59:24] S1: So the fund board says, like, okay. We need a pause. We need a recess. We need a little more time for the dust to settle and figure out what to do here. Let's take a month, and, Jack, we will direct you, since you wanna do this, to go prepare a study, a feasibility study of, like, what are the available options to us as the fund and the board of the funds? [00:59:48] S0: Because you're kinda just proposing the nuclear one here. Can we get the whole gradient? [00:59:51] S1: Give us the full gradient. [00:59:52] S0: Because it is kinda nice relying on Wellington. I mean, they've built out a lot of infrastructure here on the management company for us to do what we do. I'd it'd be a little bit nuts to just say, sorry. We're starting something new from Whole Class. [01:00:05] S1: From scratch. So Jack goes away, prepares a 250 page report. [01:00:10] S0: Of course. [01:00:11] S1: It's like he's back in his carol at Firestone, you know, library writing his senior thesis again.
01:00:11 · David Rosenthal, Ben Gilbert
[01:00:11] S1: It's like he's back in his carol at Firestone, you know, library writing his senior thesis again. [01:00:17] S0: And it's full of data. I mean, he has really, really done the research, done the math. He is making a extremely well formed pitch here. [01:00:26] S1: Yep. So the thesis statement of this report that he presents to the board the next month in February reads, quote, the present structure has been the accepted norm for the mutual fund industry for fifty years. The issue we face is whether a structure so traditional, so long accepted, so satisfactory for an infant industry as it grew during a time of less stringent ethical and legal standards is really the optimum structure for these times and for the future and for the Wellington Group of Investment Companies, or rather should the funds see greater control over their own destiny? And, obviously, Jack's answer to the question is yes. [01:01:07] S0: I mean, fire and brimstone. He's got a preacher in
01:01:07 · Ben Gilbert, David Rosenthal
[01:01:07] S0: I mean, fire and brimstone. He's got a preacher in [01:01:10] S1: him. He's he's motivated. He is motivated here. And he actually has a telling quote in his memoir that I think speaks to his mindset at the time. He says, yes, mutualization of of the fund and fund's activities was totally my idea, And I realized that a mutual company would never provide me with the personal fortune that so many denizens of Wall Street would earn, but it offered, I believe, my last best chance to resume my career. Obviously, it's both here. Jack is idealistic, and this is his chance to save his career. This is his opportunity of last resort. Yes. Ultimately, the fun board comes back and does vote with Jack barely. Infantissimally barely. [01:02:04] S0: They they carve out a small job for him to do Yes. But not the the whole thing that he had asked for. [01:02:10] S1: Yes. They say, okay. You can remain chairman of the funds, and we will endorse some very, very small degree of separation from Wellington Management Company, but not everything and not to start. We will empower you to go form a new subsidiary company of the funds collectively owned by the funds and thus the clients in the funds, and we will authorize that company to take over fund administration only. So not investment management, not marketing and distribution, those will remain with Wellington management company, but we will run a little experiment, all the back office, tax, accounting, legal, fund holder registers, etcetera.
01:02:10 · David Rosenthal, Ben Gilbert
[01:02:10] S1: Yes. They say, okay. You can remain chairman of the funds, and we will endorse some very, very small degree of separation from Wellington Management Company, but not everything and not to start. We will empower you to go form a new subsidiary company of the funds collectively owned by the funds and thus the clients in the funds, and we will authorize that company to take over fund administration only. So not investment management, not marketing and distribution, those will remain with Wellington management company, but we will run a little experiment, all the back office, tax, accounting, legal, fund holder registers, etcetera. [01:03:00] S0: Which is Jack's least favorite thing to do. Yeah. I mean, which is everyone's least favorite thing to do. The the the fun stuff is picking what to invest in and seeing if you can then go out and, you know, sell clients and bring in new money. Traditionally, it's fun to be the stock picker or it's fun to be the salesperson. It's not fun to be the person making sure the accounting checks out. [01:03:22] S1: Yep. And, indeed, most management companies outsource this. They don't do it themselves. [01:03:26] S0: Yep. And, technically, he was explicitly precluded from offering investment advisory services. [01:03:34] S1: To the funds. Yes. To the funds. Yes. [01:03:36] S0: Store that away, listeners. Keep that in mind. And Jack logs the win. He's like, cool. I got something. [01:03:41] S1: Yep. Yeah. So, I mean, hey. Look. It was either his career is over, and he's, you know, out on the street proverbially.