Vanguard has been the prime beneficiary of the surge of interest in low-cost investing. Do you think Vanguard’s leadership in this area is the primary reason, or are other factors at play?

Mr. McNabb: Low costs are certainly one factor, but there’s much more going on. At Vanguard, low costs aren’t a recent phenomenon. We have a 40-plus-year history of reducing costs, and we’re glad that we’ve led efforts to educate investors on the importance of low costs to long-term investment success. Better still, that trend has caught on, as fees across our industry have fallen. Some call that “the Vanguard effect.”

We’ve seen record net new investment into Vanguard over the last several years, and the pace has been accelerating. We’re humbled by that and gratified, because it demonstrates that our way of investing is making sense to more and more investors. It’s also a recognition in the marketplace of just how difficult it is to beat low-cost, highly diversified portfolios.

But to truly maximize investors’ chances of success, it takes more than low costs. It takes deep experience and quality funds that can be used to build balanced and diversified portfolios for the long term. It takes smart investment research that leads to sensible asset allocation plans. And it takes giving clients sound insights into the investing and economic environments that will prevent them from making mistakes that can take years to repair.

We’ve always been about lowering costs, but we’ve also always balanced that with constantly improving the experience for our clients.

Vanguard has lowered costs further this year. Do you expect to keep doing so?

Mr. McNabb: It’s tempting to chalk up Vanguard’s recent expense ratio reductions as the latest shot fired in some industry “fee war,” but this really is business as usual for us. We’ve been lowering costs for four decades—and we’ll continue to do that. That’s a win for investors.

But, again, this isn’t a race to see who can offer the lowest fees. Low fees are just one component of a successful investment portfolio. The way I look at it is: Low costs are necessary, but they aren’t—on their own—sufficient.

You also need to give investors the right tools to make informed decisions and encourage greater savings rates, prudent asset allocation, and discipline. That’s where Vanguard has really spent a lot of time and resources.

Let’s talk about those tools. What is Vanguard doing to continually improve clients’ experiences?

Mr. McNabb: Our investors come to us for a couple of reasons. They expect the investment product to be very high-quality, low-cost, and enduring in nature. But there’s also an expectation that we’re going to provide the right kinds of services to help them make the best decisions so they can stay informed about what’s happening both within their portfolios and in the world at large.

To address our clients’ expectations, we’ve invested heavily in technology. I think of that technology investment as doing three things:

First, we want to make life easier and more convenient for clients. That’s where a lot of technology resources have gone in recent years. You can see that in the enhanced experience for our clients on mobile devices and on the web.

Second, technology, at the most basic level, can provide efficiencies that allow us to do more for our clients at a lower cost. We often refer to this as using the scalability of the business for our clients’ benefit.

Third, we deploy technology to help our crew [employees] help our clients even more. The technology that we use in our Personal Advisor Services offering is a good example.

There’s an emerging fourth category that is attracting a lot of our attention. I’ll call it infrastructure. We’re a large employer, at this point nearly 17,000 people, and we run complex operations. In order to manage risk appropriately, in order to manage our people appropriately, we need to really invest on the “insides” of Vanguard. Two areas come to mind: cybersecurity and investment management. In short, we’ve invested considerably to protect clients’ confidential information and assets, and in our investment management infrastructure to be more effective and efficient in managing your money, with the objective of improving returns.

You mentioned Personal Advisor Services, or PAS. Can you talk a little more about that service?

Mr. McNabb: PAS is almost two years old now. It gives investors with smaller portfolios first-class account management service through the combination of a professional advisor and powerful digital technology. Essentially, clients turn over to Vanguard all portfolio decisions in a full advisory arrangement. Our low-cost focus extends to this offering. The price point is competitive with the leading digital-only robo-advisors. [The annual fee is 0.30% of assets, with a $50,000 investment minimum.]

It’s clear that investors are getting their advice from multiple sources. Regardless of how they obtain it, what do you think constitutes good investment advice?

Mr. McNabb: A good advisor should be focused solely on what’s in the best interest of the client.

To provide good advice, that advisor—whether it’s a human being, a computer algorithm, or a combination of the two—has to know the investor’s goals. That seems really simple, but when you press many investors, they actually have multiple goals. You have to get a clear understanding of what those goals are and where they may compete with one another. The overall asset allocation of an investor’s portfolio is also crucial. Anybody who’s providing advice has got to get that right.

Another important role an advisor can provide is discipline. The very best advisors can keep their clients from overreacting to market “noise,” and they can add a ton of value by systematically rebalancing their clients’ portfolios and informing clients how to react to different external factors. To me, that part of the advice equation is what adds the most value because you can get the goals right, you can get the asset allocation right, but if the client reacts to noise and changes the allocation, you undo all the value.

The last thing I’d say is that good advice can’t be so expensive that the cost erodes the value of the advice. In a lower-return environment, which we expect over the next decade or so, costs for investors will become even more important.

Vanguard also has been investing in service enhancements to deal with the significant growth in assets we manage. How are those initiatives coming along?

Mr. McNabb: We’ve had to make a lot of changes internally to accommodate growth because the numbers are at such an unprecedented level. We’ve had service challenges that we’re not particularly proud of, but we’ve tried to respond quickly and aggressively. We’ll continue to do that.

Our recent growth—and that of some of our competitors—has triggered a debate about whether indexing is becoming too big. How do you respond?

Mr. McNabb: Regarding the indexing question broadly, the short answer is no. Indexing represents only 15% of global equity market value and a little more than 3% of fixed income market value. And it’s a fraction of actual trading volume.

To me, what the flows into indexing represent is a realization in the marketplace of just how difficult it is to beat low-cost, highly diversified portfolios. As an aside, we’ve actually seen clients invest a fairly large amount of money into some of our actively managed funds, both on the equity side and the fixed income side.

The debate shouldn’t be indexing versus active; it’s low cost versus high cost. If you’re going to be successful as an active manager—and we do think there’s a place for active—it needs to be low-cost active. We’ve always been a champion of that.


Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.

All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Diversification does not ensure a profit or protect against a loss.