Vanguard may be bypassing the vaunted “owners” of its low-cost index funds as it shifts to Wall Street-style executive competition tactics to thwart rivals and drive out wealthy investors.

The Malvern, Pa.-based company’s shareholder profits are being sapped by undisclosed millions in executive and staff pay raises as the company seeks to shore up its eroding value proposition.

Note from Brooke: Vanguard gets it both ways. He got slaughtered last year when he launched a boo mobile app. He was also hammered on the service during the pandemic. Yet this article focuses on Vanguard, perhaps, taking the steps to modernize its workforce that could lead to an overhaul of service and the digital experience. Yet the way CEO Tim Buckley channels his inner BF Skinner for better talent and better effort collides with Vanguard’s other big new emphasis – the co-operative “shareholder” structure. In theory, every investor is a virtual owner. The potential conflict is that when Vanguard chiefs pay themselves princely Fortune 500 salaries, those dollars are subtracted from shareholders’ take, at least in the short term. Yes, this is the way of the free (and not free) enterprise world. Move on. But that doesn’t really explain why – hopefully – Vanguard refuses to share information about this giant expense item with its “owners”. It also makes it harder to connect the dots as an owner on strategic changes that seem out of character Vanguardian. Are they made for the benefit of downstream shareholders or upstream shareholders? Or do they give or take roughly the same? And why this conflict in a company that is apparently a model of transparency for investors?

Vanguard’s secretive shift to a Wall Street-style business model worries longtime corporate watchers who fear it will come at the expense of “owners” who invest in its traditional, low-cost index funds.

Daniel Wiener: Pushing salaries or bonuses… to astronomical levels [they are] still costs.

Evidence of the shift emerged when an internal memo surfaced in a newsletter revealing a 24.2% increase per share last year over the previous year in an employee dividend. – the largest increase since 1987. Vanguard did not dispute the report.

“If the base knew how much these guys got paid while they were busting their ass…” says Daniel Wiener, who publishes “The Independent Adviser” newsletter for Vanguard Investors.

“With angry owners, it may be time for mutiny.”

But these days, Vanguard is both defensive and offensive because corporations are stealing its playbook and even its culture and philosophy, says Eric Balchunas, author of the just-released book, “The Bogle Effect.”

The book shows how legendary investor John “Jack” Bogle turned Wall Street upside down in 1975 with his radical idea of ​​making investors the real owners of his new fund company.

For years, Vanguard’s philosophy has been to prioritize the “owners” of its low-cost funds and reward them with profit sharing.

But “a lot of companies act Vanguardian,” says Balchunas. “There are a lot of Vanguards at Schwab these days. Vanguard is now as much a concept as it is a business.”

Give alarms

Vanguard’s response to growing competition has been to go in the opposite direction: upscaling. Among other things, he began wooing wealthy investors with private equity and active management. See: The Vanguard Group’s private equity push is getting real.

Eric Balchunas
Eric Balchunas: It’s not your grandfather’s Vanguard.

“Certainly Vanguard realized it needed to be driven by outside ideas, especially in emerging areas of opportunity, like direct indexing. of Central America, homemade,” said Will Trout, Director of Wealth Management. to Livonia, Michigan, consulting firm Javelin Strategy and Research, via email.

Vanguard also struck its first whimsical promotional deal with American Express to attract a large number of affluent investors. See: Vanguard, American Express INVEST deal hits a wall – of hard numbers – shattering its supposed value amid blatant ‘fine print’ disclosure – it’s a huge conflict of interest for Amex

The rulings, however, have raised alarm bells among longtime corporate watchers as they suggest Vanguard is selling its owners short to compete at a higher level with Wall Street firms.

“The management team has put growth above performance. Admittedly, the agreement with American Express is an asset collection agreement and is not in line with [Vanguard’s] cheapest mantra,” Weiner says, via email.

High profits

To make matters worse, Vanguard is hiding key data — like human talent-related operating expenses — from shareholders, which is likely counterproductive, Balchunas says.

“When you shut down news, people think the worst.”

Unlike shareholders of public companies — or even most private nonprofits — Vanguard shareholders are denied access to finances, including how and to what extent staff and senior executives are compensated.

Wiener says the company has also blown away the vaunted sense of ownership.

“Vanguard is not, and never has been, a non-profit organization, although much of the language [used is] around ‘operating at cost price’… [it is] excessively profitable.

“If I raise salaries or bonuses… to astronomical levels [they are] still costs. It all depends on how you analyze the language.

“Does a $20 million bonus have a cost? I think so,” Wiener says.

“How does Vanguard fund their partnership plan if not with profits? Well, then I guess [its] not a non-profit organization. It’s kind of circular, its perception, and the opacity around it.”

Slice the pie

Vanguard’s value proposition is anchored in the Vanguard Partnership Plan, which emphasizes the value of investor ownership. Instituted in 1984, the plan further aligns “the interests of our crew and the long-term success of our customers,” spokeswoman Amy Lash said by email.

david danon
David Danon has taken his issues with Vanguard’s use of its mutual structure to court.

“The partnership plan is based on value created for customers over a rolling three-year period. The performance calculation shared with the crew this year was for the three-year period ending December 31, 2021,” it adds. -she.

“And it’s been a good three years for Vanguard, with assets up about 76% over that time – the best rate since 1999 – the partnership plan dividend is up 54%,” says Wiener.

The dividend increase, from about $352 to $437.56, also primarily reflects Vanguard’s ability to control costs relative to its industry peers, Wiener adds.

“[AUM] growth, rather than fund performance, [is] a key factor determining the size of the dividend. The other factor…is the “cost savings” achieved by comparing Vanguard’s average operating expense ratio to industry averages. »

According to Wiener’s research, Vanguard caps most employee bonuses – except those awarded to its top brass – at a level calculated based on their “ranking”, seniority and percentage increase in the dividend. .

Usually paid out between April and June, Vanguard’s partnership plan once paid tenured employees up to 30% of their salary as a bonus. Yet in 2010, the company restructured its partnership and reduced payment levels, according to the Philadelphia Inquirer.

In 2015, Vanguard reclassified 2,100 employees as hourly workers, removing them from its bonus system, according to the Philadelphia Inquirer newspaper.

Pay top talent

“While the nuances of the partnership plan are not public, the overall goals of encouraging growth and asset efficiency to produce cost savings are clearly in the best interests of shareholders,” said Scott Smith, Chief consulting relationships at Boston, Mass. Cerulli Associates, via email.

Cecile Munoz
Cecile Munoz: We all know they’re not for profit, just like the rest of Wall Street

“Don’t let the perfect be the enemy of the good.”

The big proof is that Vanguard manages about 25% of industry assets but collects about 5% of total revenue.

Cécile Munoz, founder and president of US Executive Search, believes that Vanguard cannot be expected to walk on eggshells when compensating to attract and retain talent.

“We all know they’re not non-profit, just like the rest of Wall Street… [but] they can operate at cost while remunerating their talents competitively,” she explains by email.

“It is fair and logical that a meritocracy [match] compensation directly correlates to the responsibility, risk and contribution of an individual’s role.”

Competitive pressure

Vanguard, as Muno notes, may have no choice but to pay out big bonuses to stay competitive, given those available on Wall Street.

Scott Smith
Scott Smith: “Don’t let the perfect be the enemy of the good.”

“He can’t afford to lag behind on the compensation front, especially as he looks to be outward looking, both in terms of using outside technology and in terms of cultural,” says Trout.

“Executive compensation is driven by competitive pressures, from which Vanguard is not immune,” he says.

Goldman Sachs paid CEO David Solomon $35 million last year, and JP Morgan paid CEO Jamie Dimon $34.5 million.

Jack Bogle would have made at least $41 million if he was still running Vanguard in 2022, Weiner calculates.

Vanguard points out that paying more employees earns investors greater “shareholder” benefits over time.

“Vanguard says it’s owned by its shareholders, but doesn’t disclose information about … how much it pays its executives, [or] what his bonuses are based on,” retorts Wiener, president of RIA Adviser Investments in Newton, Mass.

“Vanguard is the prototype aircraft carrier, a course change takes time, and it’s important that all reinvention-focused initiatives are coordinated,” says Trout. See: Vanguard mocks ‘digital’ myth by grossing $1.3 trillion after failed debut of new mobile app.

“It’s not your grandfather’s Vanguard, but it’s Vanguard nonetheless,” Balchunas says.

Although Vanguard no longer shares details of its payment system, Wiener uses an old stock count provided to Jack Bogle to calculate an approximate number.

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