William McNabb III

Financial advisers know little of William McNabb III, who today replaces John J. Brennan as president of The Vanguard Group Inc. and who will be taking Mr. Brennan's position of chief executive in about a year. Mr. McNabb, 50, however, wants advisers to know that under his leadership, Vanguard will continue to develop tools and resources to meet their needs. It's an important point considering that there is still bad blood between some advisers and Vanguard over the company's decision in 2003 to abandon the custody business.
In one of his first interviews since his accession was announced Feb. 22, Mr. McNabb, who has been with the Malvern, Pa.-based company since 1986, talked about why advisers shouldn't let their opinion of Vanguard be colored by the decision to exit the custody business, as well as what advisers can expect from the low-cost asset manager. Q. How would you characterize Vanguard's relationship with advisers today? A. All you can do is state the facts. If you look at assets under management, [the adviser channel is] a big piece of what we do now. It's one of our five core businesses. We have devoted a lot of resources to it. We've launched a number of [exchange traded funds]. We now have 37 ETFs, 11 of which were launched in 2007. We have a commitment to making sure we have an extensive product line. We have developed a high-powered adviser-oriented website that's growing by leaps and bounds in terms of its use. There's been a very tangible commitment to the business. People ask about the custodial business. This will sound kind of harsh, but at the end of the day, it flunked our own value proposition. We want to be the highest-value provider of investment products and services in the world. We looked at what we were doing there, and we were not highest in value. Our service was good, but it wasn't great by our own standards. Q. Is Vanguard doing everything it can to help advisers? A. We've worked pretty closely with a lot of our key advisers as to what else we can do. This is a small kind of tactical example, but we have immense experience in the 401(k) world, educating people around savings and using 401(k) plans. Our center for retirement research has done some of the real pioneering work of applying behavioral finance to the retirement market, and we share that data, that information, with our clients. Q. Do you plan to reach out personally to advisers? A. I've met a pretty good number of our adviser clients over time. I certainly haven't met them all. I have been out and visible with some but certainly not with all. That will be an ongoing thing. Q. Many advisers said they are surprised you are taking over for Mr. Brennan, who is only 53. Why you are taking over the helm at Vanguard now? A. It's probably a question that is best asked of [Mr. Brennan]. But Jack has been president since 1986 and [chief executive] since 1996. He's said a number of times both publicly and privately that that's a long period of time, and that in any organization's life, it's useful to get a fresh perspective after some period of time. I think that he just felt it was time. Q. What fresh perspective do you bring? A. It's a fair question in that I have been part of the leadership team for some time, and he and I have worked very closely together. I think [Vanguard's] value system in terms of what it represents is never going to change; the focus on the client and on being the highest-value provider — that, hopefully, is going to be constant. Where a fresh perspective comes into the equation is in how you do things. Even modestly different leadership styles can lead to different ways of doing things. Again, I've spent a lot of time with Jack, so we have a lot of similarities in terms of how we view the world. He's been such an integral part of everything that's gone on for the last 25 years. But the dynamic is bound to change. Other people will grow and evolve. Q. In what ways could Vanguard be doing better? A. One of the areas I'm very intrigued by is our overseas business. We continue to be encouraged that our value proposition resonates in different parts of the world. That's a $100-billion-plus business for us today. We're very excited about that opportunity. Q. Do you think Vanguard would be more competitive overseas if, as the Investment Company Institute of Washington and others have suggested, fund managers in the United States were allowed to create funds based on the European model, which doesn't include fund boards? A. I haven't really looked at that carefully. I've got to tell you, though, our board is one of the greatest strengths we have. I think far from being a burden, I actually think it's a competitive advantage, versus a lot of other models I have seen. If I'm an investor, I take great comfort knowing that the kinds of people we have on our boards are holding the management team's feet to the fire. Q. What do you say to critics who believe that Vanguard is moving away from its heritage by getting into investments such as ETFs, which some industry experts such as Vanguard founder John Bogle believe encourage investors to trade unnecessarily? A. ETFs can certainly be used as a substitute for derivatives. You have seen different institutional players using them as such. And frankly, you have seen a lot of esoteric product design out there to generate interest from that constituency. All of our effort has really been around the adviser. You can even see it in the kind of product we have developed. We're trying to provide people with building blocks to put together well-structured, highly diversified, low-cost portfolios. Q. How big a role do you see ETFs playing at Vanguard? A. I think it's an important element of our business. My take on it is that we are bringing the Vanguard story of low-cost, long-term disciplined investing to more people. We're bringing that heritage in a new way to a new clientele. We're seeing registered investment advisers with whom we have had relationships for years, and financial advisers, really respond. I think it's going to be an even more prominent part of what we do going forward. E-mail David Hoffman at dhoffman@investmentnews.com.