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Jack Bogle and the Disruptive Vanguard Experiment

John C. Bogle, the founder of the Vanguard Group, passed away this week. In the fall of 2016, Guideline’s CEO, Kevin Busque, and I had the honor to meet Jack at his office at the Vanguard campus in Valley Forge, Pa.

John Bogle and Kevin Busque

Jack’s story is one of impact. He was the motivating force behind the low-cost, index fund revolution. His passing provides an opportunity to look back at his accomplishments and what he did for investors.

One of the things that may be under appreciated about Jack is that he was fundamentally an entrepreneur who created a disruptive business model that improved people’s lives.

When he had a falling out with his partners at Wellington Management in 1974, his separation agreement limited his ability to start a new investment manager. He founded Vanguard in 1975 to handle fund administration, but the company couldn’t actually manage the underlying investment portfolios or market them.

As Vanguard outlined in their memorial: “To describe his new venture, Mr. Bogle coined the term ‘The Vanguard Experiment.’ It was an experiment in which mutual funds would operate at cost and independently, with their own directors, officers, and staff—a radical change from the traditional mutual fund corporate structure, whereby an external management company ran a fund’s affairs on a for-profit basis.”

This led him to two creative ideas. He and the early Vanguard team developed the first index fund for individual investors, an unmanaged fund because it tracked the S&P 500. And then a few years later, Jack realized he could market funds directly to end investors rather than following the industry standard at the time—going through brokers who were paid upfront sales loads.

This created a fundamental cost advantage in two ways. First, the cost of administering an index fund is significantly lower than the cost of administering an actively managed fund. Adhering to an index requires access to data and a set of trading rules, but avoids the costs of investment research and hands-on portfolio managers. Second, by circumventing the traditional and expensive way to market mutual funds to investors through expensive brokers, Jack and the Vanguard team found a way to reduce their marketing costs significantly.

To his credit, Jack chose to pass essentially all the cost savings on to the end Vanguard investors, rather than retain them in profits for Vanguard and himself. He could have been a billionaire but chose not to be.

Fast forward 40 years, and Vanguard is the largest fund company in the world, managing almost $5 trillion in assets, with an average expense ratio of 0.11% versus the industry average of 0.62%. With its unique structure, Vanguard continues to put downward pressure on investment fees.

This has enabled us at Guideline to offer our clients diversified portfolios using Vanguard Admiral shares for 0.06-0.07% ($6-$7 for every $10,000 invested).

Jack Bogle made his life’s work helping individual investors save for their children’s education and for comfortable retirements. We are proud to walk in the path this great entrepreneur carved.

Thank you, Jack!