Vanguard Investments – From ‘Folly’ to Fiduciary Giant

As we work with clients on elevating their brands two questions arise repeatedly:  Can ‘ueber-branding’ be applied to more ‘technical’ categories – beyond luxury or lifestyle?  And do Ueber-Brand products HAVE to be premium priced?

The short answer is ‘yes’ and ‘kind of’, respectively.  ‘Yes’, your category can be technical or outright nerdy. It might be ignored or even despised by many. But you can still build an Ueber-Brand. There is nothing inherently desirable – beyond functionality – about messenger bags, toilet paper or thermostats… until a Freitag, Renova or Nest comes along to make it such.   But Ueber-Brands, as we define them, ‘kind of’ have to be premium-priced.  That is not only because taking your brand ‘ueber’ in the appreciation of your customers allows for it. Being able to sustain a premium actually is part of the proof that you are about more than your good or service, that you mean more to your buyers. In a sense, the price premium is a test to your meaningfulness and at the same time makes it easier to fund those high-quality brand experiences, to keep volumes small, to finance a mission goes beyond the product.  For creating a dream, saving the earth or doing social justice all along your supply chain will come at a cost.  Vincent Stanley at Patagonia argued in one of our interviews that the price of most garments – even their own, premium-priced ones – are too low and that societies in emerging markets and our environment have to foot the bill for the disastrous waste that causes.

All that said, we sometimes do encounter brands that strike us as acting a lot like Ueber-Brands even though they have chosen to charge average prices or have even made affordability a core part of their mission.  One such brand is Vanguard Investments.  And since Vanguard operates in an industry that most of us would think of as the opposite of ‘lifestyle’ or ‘aspirational’, we thought it would be neat to illustrate and discuss how many of the principles that we describe in our book as being used by modern Prestige brands can also be applied to a mutual fund company with similar effect. Even if Vanguard does not go all the way in ascending to Ueber-Brand status – at least in our book. But then, that would not be in the spirit of the enterprise, as we will see.

It is important to note that our point is NOT to give any investment advice – we are not the experts for that. Rather, the point is to illustrate how key characteristics of are reflected in in Vanguard – and we like to think of ourselves as experts in the arena of brand building.

ueberbranding-principles

The Vanguard Myth and Mission

Vanguard was created by John Bogle in 1975 based on a – at the time – unusual, if not rebellious but simple set of investment and organization principles. Central to these principles was the believe that the average investor – meaning most of us – cannot beat the market over the long run but can maximize the returns by saving early, staying invested in a portfolio that mirrors the market and keeping costs to a minimum.

Since his undergrad thesis in 1951 Bogle has analyzed the ever more plentiful data available to make these points over and over again. Already back then, he started to point out that the bulk of the investment industry charged unnecessary and excessive fees to investor for ‘actively managing’ portfolios in the pursuit of a much advertised but ultimately futile goal – continuously above-average returns.  In response, he created the ‘index fund,’ a weighted portfolio of a large part of the market, designed to be mostly left alone, thus attracting minimal transaction costs while yielding average market returns that beat those of many funds in any given year and almost all of them in the long run, as he never grew tired to show.

“We all think we are better drivers, lovers, investors.  But at the end, we have to admit, we are mostly average.  There is no Lake Wobagone in investing.  If we trade … it is mostly driven by ego versus reason” — JOHN BOGLE, interview 2013

But Bogle went beyond the product and convinced his board to convert the Vanguard organization into a client-owned mutual fund company that owes nothing to outside owners. This has remained a unique set-up in the industry. There are other aspects that make the Vanguard set-up a clear winner in the minds of its fans, like a potentially higher tax efficiency… But rather than discussing technical aspects, we want to draw your attention to how strong, often contrarian convictions that John Bogle and Vanguard have been vocal about and pursued for over half a century have created a brand that is admired or even loved – something that is rather rare in the financial industry. For this man and his fund have become Legend and Vanguard’s voyage has become Myth – even if the brand does not nourish and maintain it as a true Ueber-Brand would do.

The industry’s reaction to the Bogle’s challenge went from derision – his fund was labelled ‘Bogle’s Folly’ –  to being annoyed (calling it ‘Un-American’ not seeking to beat the market or make fat profits) to copying the index fund construct.  Despite the adversity, Vanguard grew from a comparatively modest $1.6 Billion in investments in 1974 to becoming the #1 individual investor company in the world managing over $4 Trillion today (that is a number with 11 zeros and more than twice the size of #2 Fidelity).

Interestingly, Vanguard attracted a disproportional and exponentially rising amount of investment after the financial crisis in 2008 which seems reversely correlated with the declining reputation of the financial industry during these same years.  In fact, investors have blessed Vanguard with a net promoter score of 60 to 70 – outranking even Ueber-Brands like an Apple or Harley Davidson (*).

This contrarian performance makes sense considering that through the crisis Vanguard held up the ‘inconvenient truth’ that only the fund managers were consistent winners in the frequent trading high fee game that preceded it. Today, Vanguard’s mission statement might sound like that of other institutions: “To take a stand for all investors. To treat them fairly, and to give them the best chance for investment success.” The difference lies in the company actually living it and that since the ’70ies. Bogle has sometimes been compared to a Robin Hood. While he is not stealing from the rich, he has certainly sought all his life to protect the small investor from greedy fund managers and help them grow their nest eggs.  And despite its omnipresence and size today (and the departure of its founder from daily management) Vanguard is still perceived as a righteous rebel by its fans and a nuisance by most of its competitors.

Bogle named the company after the flagship on which Nelson beat Napoleon’s formidable navy in the Battle of the Nile after a long pursuit across the Mediterranean. — to reflect his battle? Vanguard also means ‘in the forefront’ and that the fund company has certainly been.


Un-selling and the Longing to Belong

Vanguard frowns upon the cold-calling practices of their investment adviser peers.  That is no surprise in a company whose founder wrote a chapter on “Too Much Salesmanship, Not Enough Stewardship.” in his 2010 book ‘Enough’.  Vanguard also doesn’t do much traditional advertising, either – it doesn’t even show up in the industry Top 10, a list that is led by Fidelity.  Vanguard easily has more money under management than all the fund management firms on that list combined, which makes for a very low media investment rate, indeed.

Vanguard likes to focus on education through its Investor Education Library, webinars and other offerings.  Peers and media expert tend find this process inefficient, requiring too much time and study on both sides.  Fast-paced Facebook certainly is not where the Vanguard action is.  Vanguard some 180k followers (2016) and its ‘like’ and engagement rates are about the same as that of its competitors.  Meaning: not much!  Compare that to a ‘Mr. Money Moustache’, a early-retirement and frugality guru who has attracted over 21 million unique visitors just by himself (*) or the ‘Motley Fool’, an independent financial advice blog that has more than double the number of Facebook followers than any of the fund sites. What both of them share with other influencers in the down-to-earth investor community though is an openly declared love for Mr. Bogle and his company.  And that is where the Vanguard ‘un-selling’ sources it’s strength: A dedicated, influential but independent fan community that spreads the word-of-mouth, directs to those harder-to-find educational materials, provides trust-worthy endorsement.  And Trust (with a capital T) is the key business driver and differentiator in an industry that has spectacularly lost trust and respect of many investors.

Note though that a lot of the word-of-mouth and influencer activity happens outside and independently of Vanguard and it appears that the company prefers to keep some distance with its sometimes irreverent or even controversial fans.  Contrast that with the strong ties and interactions a Harley Davidson, Red Bull or Patagonia would seek and animate with their disciples or ‘Design Target‘, as we call them.

This is surprising because Vanguard has an important – over fifty thousand strong – and organized fan club that follows the brand closely, discusses its actions – and defends it against the ‘non-believers’.  They call themselves the ‘Bogleheads,’ tipping their hat to their idol, and are on a ‘crusade to give ordinary investors a fair shake’ (*). Besides lots of investment intelligence imparted at the rate of thousands of posts a day, the Bogleheads blog, books (two, so far) and events also spin the yarn that has become the Vanguard legend. Jack is their beloved hero (*), the man they want the Presidential Medal of Freedom to be bestowed upon (*) and he loves them back for it through his own publications and appearances at their events.  Some of this is reminiscent of the kind of ‘Coco lore’ surrounding the Chanel brand or the idiosyncratic to outright quirky affaires like the Berluti Swan Club dinners with Olga Berluti – of bespoke shoe fame (*).  Except that it is an altogether more frugal and studious affaire on the side of these savant savers. We even observe a bit of the mix of inclusivity and exclusivity, pride but also provocation that we usually find hard at work with modern Prestige brands.  For while Vanguard disciples will mostly look to convince and convert, there are instances where they cannot hide a certain level of sarcasm or even aversion towards those who do ‘not get it’.  Just ask them about ‘how to start day trading’ and they will tell you to save your time and just flush the money down the toilet(*).

The Product and Organization as Manifestation

Ultimately Vanguard’s funds are the finest expression of its mission and investment philosophy. They are simple by design and transparent in their reporting. That’s in stark contrast to the highly engineered, complex to obscure and thus expensive to potentially (financially) lethal products that tend to become the rage before their bubble bursts.  To ‘Vanguardians’ their simple funds are the ‘holy grail’ and they like to point out (or rub in) that their funds easily ‘beat 90% of managed funds in the long run’ – the ivy league managed ones included.  And for that, they happy to pay a special kind of price: restrictions like high minimum investments or ‘frequent trading penalties/restriction,’ which would be anathema with other investors and their brokers.

“Fund reports will ‘tell it as it is.’ If results are good, we will say so; and if they are not, we will be equally candid. In short, our reports will be written from the perspective of the shareholder” — JOHN BOGLE, 1975 – he wrote those report himself until his retirement in 1999

But living-up to the mission does not stop at the product proposition.  Rather, it is the output of a leadership and organization that truly live and breathe its mission:  Organized as a mutual company that as Vanguard CEO Bill McNabb emphasizes in a video to employees has “only have one constituent, our owner -investors.”  Located in quiet (and low cost) Pennsylvania countryside rather than one of the the frantic and expensive financial hubs and with the frugal expense policy to go with it. Stories abound of a pragmatic culture where everyone from new hire through top management is willing and able to roll up their sleeves to help out, answering customer service requests or other peak period demands. McNabb emphasize that they do not hire ‘rocket scientists’ but select people with character, common sense and integrity’. An academic study concluded the resulting high esprit-de-corps and pride enables Vanguard to compensate its employees with more than money and keep wage costs down.

This is where a true Ueber-Brand would go further, though, in elevating its impact, applying its believes and leveraging the energy of its organization beyond the confines of the product proposition.  For example, Vanguard is not choosing to invest itself in actively seeking to educate the average citizens on how to save and secure their retirement or even lobby for a fairer distribution of wealth in the face of a ‘disappearing middle class’ and ever more numerous ‘working poor’. That’s what a Patagonia or Ben & Jerry’s Investment Company might do. – But then, that would require manpower and funds a lean low cost operator can not afford to spend.

Growth without End – The Ultimate Balancing Act

Vanguard is a behemoth that benefits from- and seeks scale, so we should not expect the cautious approach to growth or outright fear of being perceived as omnipresent that many Ueber-Brands share.  That said, Vanguard does exhibit more caution in how it grows than one would assume. In fact, it has a reputation to be slow among industry observers. Slow in expanding to new investment categories, to new markets or to new financial tools.  Sometimes seemingly unwilling to exploit areas of fast growth. For example, it took Vanguard decades to convince itself to also recommend international equity funds in the US. And the company is still mostly absent from foreign retail investment markets. It takes a personal phone conversation to buy junk bonds at the Vanguard brokerage.  The reasons are as much ideological and about staying true to yourself as they are about government regulations. Competitors like Fidelity or Templeton have pushed ahead into the international domain a long time ago while Vanguard continues to deliberate over a lack of transparency at some foreign stock markets, the possibilities to control the retail chain and communication, the temptation being created for investors to speculate on currencies or countries rather than pursue a diversified long term strategy and so forth. Like a careful gardener, Vanguard wants to study the compatibility before introducing a new species.

Of course, with a slower pace comes the risk of getting outdated. Most recently, robo-investor platforms like ‘Betterment’ or Wealthfront, for example, have become the talk of the town and seen rapid growth with Millennials as their early adopters. These tools offer highly intuitive interfaces, have automated the behaviors Vanguard advocates like cost averaging, re-balancing, loss harvesting and project the benefits through easily understood and engaging digital reporting.  More importantly, these brands feel closer to a generation that trusts fellow hackers and their algorithm more than a Boomer investment advisor (*). One of the apps is called ‘Robinhood’. The challenge for Vanguard – like many brands today – is not only technological but how to evolve their higher brand purpose in ways that resonate with that next generation before someone else does it in their place. — And it might just end up turning into a full-fledged Ueber-Brand in the process.

FURTHER READING:

For more insights what drives the success of Ueber-Brands like Vanguard, read our book “Rethinking Prestige Branding – Secrets of the Ueberbrands” and other case-studies on this blog.

Here just one example of Jack Bogle and Vanguard becoming legend. Read this account of ‘A Meeting with Jack Bogle’ by Boglehead co-founder (and ‘high priest’?) Taylor Larrimore. Hard to believe this story is about a captain of finance. Here is a link to the first ‘Boglehead’s Guide to Investing’ book.

Here is one way in which Vanguard funds are the ‘holy grail’:  The Vanguard index portfolio versus the highly brainy and highly paid ivy league college endowment investment funds that pride themselves to be the smartest and best performing funds in the world: Bogle vs. Goliath

Want to get technical?  Sample this Vanguard research paper “Debunking some Myths and Misconceptions about Indexing” – the advocacy never stops.

Mr MoneyMustache’s website is a must-read for every fugal early-retirement freak.  Or read this New Yorker magazine article about Money Moustachianism which is shorter but just as fun and instructive.

Finally, the Motley Fool website and their love letter to Mr Bogle.

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About JP Kuehlwein

JP Kuehlwein is Co-Founder and Partner at ‘Ueber-Brands’ a New York consulting firm that helps elevate brands in the minds of people and above competition to warrant premium pricing and profits. He previously was Executive Vice President at Frédéric Fekkai & Co, a prestige salon operator and hair care brand and worked at multinational Procter & Gamble as Brand Director and Director of Strategy. JP is a recognized global business leader and brand builder with a 25+ year track record of translating consumer and brand insights into transformational propositions that win in market. His experience spans from developing a global communication strategy for the world’s leading detergent to introducing a new-to-the-world food wrap, disposable diapers as a category in India and a premium skin care brand in China to turning around a luxury lifestyle brand in the US. JP’s latest book is the bestselling “Rethinking Prestige Branding – Secrets of the Ueber-Brands” which he co-authored with Wolfgang Schaefer.
Gallery | This entry was posted in 1 - Mission Incomparable - The first rule is to make your own, 2 - Longing vs Belonging - The challenge is both, 3 - From Myth to Meaning - The best way up is to go deep, 4 - Behold! - The product as manifestation, 5 - Living the Dream - The bubble shall never burst, 6 - Un-Sell - The superiority of seduction, 7 - Moving with Gravitas - The king never hurries, B - Ueber-Brands. Bookmark the permalink.

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