Brennan: ETFs Gave Advisors Missing Tools

January 08, 2013

Brennan (cont'd): And it’s not just ETFs. It’s indexing as well and a generalized awareness that cost matters. I love talking to advisors and asking them how they use ETFs. And they're using them right. They're using them instead of, again, deciding whether they like three tech stocks or four other tech stocks today, and so on. None of us stays in the business unless we have clients who make money and are satisfied. We’ve been active in the advisor space for seven or eight years, and clients have better portfolios today.

IU: One of the biggest innovations coming to the industry is the idea of actively managed ETFs. What’s your feeling about that?

Brennan: I have to admit, I have never totally gotten the active-ETF idea. It’s probably because I believe an ETF is an index fund. So the question is, How active? If it’s a broadly diversified “active portfolio,” it makes some sense. If it’s a high-turnover, active-equity strategy, it’s not totally clear to me what value there is in having that package as an ETF. It’s an interesting part of the business. The idea that active ETFs are going to be a big deal is 10 years old. But only a couple of active bond funds have gained traction. And it may make more sense in a bond fund. But I have to admit, I scratch my head. It almost feels like an oxymoron to me to say “an active ETF.” There ought to be a different categorization for an actively-managed product, to be blunt.

IU: What is your single biggest accomplishment during your tenure at Vanguard?

Brennan: You know what it is? It’s people. For me, because I had the privilege of being president for 20-something years and the CEO for 12 or 13, the biggest thing that I could do is try to get the people right, and [newly retired Chief Investment Officer] Gus Sauter is a classic example. The fun for me with Gus is that we just passed our 40th anniversary together in September. We met the first day of college at Dartmouth and re-engaged at our 11th reunion. Some may think this apocryphal, but I sat and talked to him and then came home and said: “This guy ought to be working at Vanguard.” The rest is history for the last 25 years. But he’s an example of—let’s see: ethical, brilliant, high values, humble, no ego. Why wouldn’t I want him on our team?

For me, the most important thing that I have done here is get the people right. It’s building that extraordinary success across the board. It all starts with the people. That’s the only thing I care about, frankly. One of the great things about people here at Vanguard, is that nobody will take credit for anything.

IU: Is there anything that sticks out that you wish you could redo or not have done?

Brennan: Speaking of Gus … Gus and I were dissed in the popular press for being bearish during the tech bubble, as if we didn’t get it. How could guys this young be that out of it? But I really wish we had been more strident in warning people. But I personally wasn’t aggressive enough. It was so obvious of what was happening. I look back and say “lesson learned.” When you're confident that something is awry, be as aggressive about it as you can. If you're wrong, nothing bad happened. But if you're right, you will have helped your clients a lot. Frankly. I wish I had been more strident.

IU: Any closing thoughts, Jack?

Brennan: Most people need an advisor. They really do, because they serve as a guide, as a strategist, as a shock absorber for them. If you don’t have an advisor, then how do you establish your plan? Investing is for pros. It’s not a game. This is not whether the Raiders won or lost on Sunday. This is a 20- or 30-year endeavor. You should kick the tires before you hire an advisor. Look them in the eye. Do I trust them? Give me some client referrals? How do you think about implementation of strategies? And so on. It’s a big deal. This is arguably bigger than picking a doctor.


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