FUTURE OF FINANCE FRIDAY

The most influential financial revolutionary is an 89-year-old with no interest in crypto

Take no prisoners.
Take no prisoners.
Image: Reuters/Shannon Stapleton
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He has empowered millions of investors while short-circuiting the money-making mechanisms that power Wall Street. He also concocted a radical structure for his enterprise that redistributes power to those who use it instead of outside interests. But, unlike bitcoin’s mysterious inventor, Satoshi Nakamoto, his identity is not a secret, and he has never written a techno-utopian white paper (pdf). He’s an 89-year-old retired business magnate in Pennsylvania who started a price war in the $85 trillion asset management industry that still rages today.

Jack Bogle thinks the revolution is far from over, and that the biggest asset managers, as they are currently structured, won’t survive. Bogle founded Vanguard in 1975 and pioneered index funds, which buy broad baskets of securities matched to a benchmark. They cost less and generally outperform the human asset managers who pick out things like stocks and bonds based on their supposed skill at identifying winners and losers. Bogle thinks you should buy and hold investments, and fire any broker who wants you to trade regularly. As fees and commissions steadily erode, the retired CEO recently told Bloomberg that Vanguard’s big competitors will only survive if they embrace Vanguard’s unique ownership structure.

Vanguard now manages more than $5 trillion of assets, a pile that’s growing larger as the money manager pushes fees down to nearly nothing. The Valley Forge, Pennsylvania-based company says its ownership structure is its edge: Vanguard doesn’t have outside owners who expect the company to earn a profit. Instead, it’s mutualized, meaning it’s owned by its own funds. Bogle’s vision was to use any money generated from managing funds to lower its fees; as its assets grow, it can charge less to manage them.

The surprising thing is that a competitor managed to reach zero fees before Vanguard did. Starting today, Fidelity Investments is offering customers two new stock-index funds sans fees. The Boston-based firm—built on the reputation of its star stock pickers—also cut fees on existing index-based stock and bond funds, and abolished investment minimums. Like at other companies, investors had been abandoning its actively managed funds. “It makes us the low cost index provider in the country, no question,” said Ram Subramaniam, Fidelity’s president of brokerage.

The war on fees was already relentless: US investors paid the lowest-ever fund expenses in 2017, according to Morningstar (pdf). The average expense ratio declined to 0.52% of assets last year, from 0.56% in 2016, the biggest drop on record going back to 2000.

A common thesis is that the asset management industry will consolidate—investment managers can survive on slim fees if they’re big enough. But Bogle told Bloomberg’s Trillions podcast that this won’t work. In the manner of a grandfatherly assassin, he suggested the likes of BlackRock are doomed by the conflicting interests inherent in their model (shareholders want to see profits increase, but customers want to see prices drop).

“In the coming era there will be mass mutualization of the large firms in the business,” Bogle told Bloomberg. “There’s a competitor out there that’s eating their lunch, and they know perfectly well why he’s eating their lunch. And so far, they have not wanted to get competitive again. They’d have to slash their fees, but they can never slash them enough.”

Fidelity showed that the battle isn’t over. By getting customers in the door with rock-bottom prices on index funds, the company may be able to sell clients other, more profitable, services. Still, its announcement sent a shockwave through the industry as asset managers steel themselves for even more pressure on fees. BlackRock’s share price fell nearly 5%, while Legg Mason’s slipped by about 4%.

Bogle’s apocalyptic prediction for asset managers may not come to pass, but for now the revolution he helped start more than 40 years ago is, if anything, gaining momentum. While his name doesn’t inspire the frenzied mania that Satoshi Nakamoto’s does, Bogle and his legions of disciples (“Bogleheads“) are altering the investment landscape in more meaningful, far-reaching ways than most other purported rebels. Could they work their magic on the burgeoning world of crypto? Probably not—Bogle told Bloomberg that Vanguard will get involved with cryptocurrencies “over my dead body.”


The future of finance on Quartz

  • Apple is becoming a formidable fintech company. Apple Pay transactions tripled from a year earlier, to more than 1 billion. CEO Tim Cook said that was more than Square and exceeded mobile transactions via PayPal.
  • Investors are questioning whether tech giants like Facebook can keep growing at awe-inspiring rates. Analysts at Morgan Stanley think payment businesses like Visa, PayPal, and Worldpay are better bets.
  • For the Big Mac’s 50th birthday, McDonald’s is distributing more than 6 million “MacCoins.” The marketing ploy helps illustrate the concept of purchasing power parity.
  • India’s Narendra Modi has nixed bank bail-ins that would put customer deposits at risk, amid the country’s ongoing bad-loan crisis. Also in India, drivers for Ola Cabs service are abandoning the company’s mobile wallets.
  • Crypto Twitter rallied behind a sympathetic watchdog at the US Securities and Exchange Commission. Hester Peirce’s following soared after she dissented from the agency’s rejection of a bitcoin exchange-traded fund.

The future of finance elsewhere

  • The oldest peer-to-peer lender has raised £44 million ($57 million) in new funding. Zopa is expanding into traditional banking (paywall) as its core business is pressured by government watchdogs.
  • The US dollar is the preferred currency for spot bitcoin trading instead of the Japanese yen, according to a CoinDesk analysis.
  • WhatsApp’s payments launch in India has been further delayed. The Facebook unit reportedly won’t be allowed to start the service until it sets up a physical office and team there. Meanwhile, South Africa’s Absa Group has launched WhatsApp banking.
  • The US government could provide a route for fintech firms to more easily compete with incumbent banks and financial companies. The Treasury Department’s report (pdf) laid out a possible framework for regulation, while the Office of the Comptroller of the Currency announced a new type of charter.
  • Square posted its smallest loss (paywall) since going public, on higher-than-expected transaction volumes.

Previously, in Future of Finance Friday

July 27: With or without Amazon, asset management is getting disrupted

July 13: A simple way to make America’s trillion-dollar student loan system more sane

July 6: The secret to crypto investing is there is no secret