Welcome to our blog, the place we get things of our chest. It's a mix of rants and raves, often about fees and the cost of financial advice, along with anything else we think you might find useful.

The mind Bogles

By Ian Millward, published 12 March 2019.

In January, John Bogle, the founder of Vanguard Asset Management, passed away aged 89 years of age. He was the pioneer of the Tracker fund industry and his passing prompted me to want to learn more about the man.

He launched Vanguard in 1975 and it is now the second largest fund group in the world looking after over $5trillion of client money around the world ($75 billion of that in the UK). Whilst Trackers are now an accepted part of the investment landscape so it is hard to imagine now just how radical Vanguard must have seemed at the time. By launching the first Tracker fund he directly challenged the fund management behemoths of the day. The message was simple but radical - most managers fail to beat their Index so just buy the Index instead and avoid all the associated costs.

But that wasn’t enough of a challenge for the man. He also completely alienated Vanguard from the advisers and salesmen that controlled the distribution of funds. The argument had always been that picking the active managers was indeed tough and well beyond the powers of the ordinary man (or woman). So you needed to pay another set of fees to a financial adviser to do it for you – usually by way of commission. John Bogle’s argument was that just introduced even more cost … so just buy the Index and avoid all the associated costs!

By the way, he didn’t say it was impossible to outperform. Just very hard to do consistently and that trying to pick the winners carried a significant risk of being wrong. So why commit yourself to all of the uncertainty, effort and risk of failure when there is a simple and cheap solution that will outperform about 80% of funds? Of course, that all sounds like common sense to us now but at the time it must have been incendiary stuff. And his view wasn’t that advisers have no value – just that they weren’t soothsayers. The value of an adviser is understanding things like tax, complex rules, products and people. And then helping the clients that need help to chart a course – while keeping the overall cost of financial advice at a sensible price!

At Candid we tend to use Tracker funds as the core of our portfolios in areas where tracking makes sense and is possible. So, for example, we have big holdings for our stock market exposure and then we weave in smaller exposures to proven contrarian managers. We don’t track bond markets at the moment as we think Quantitative Easing and the aftermath of the financial crisis has still left that market very distorted. And we like to include physical property funds where we can – so by definition you can’t track that. I liked, and agreed with, just about everything I read in John Bogle’s book and I am reasonably confident he might have felt similarly had he ever looked at our portfolios and the approach we take to looking after clients.

I am always a little bit intrigued by the hidden reasons behind decisions. Back in the day, many advisers used to eschew Tracker funds because they felt they undermined their credibility in front of the client. They would always eke a living by ‘selling’ whatever was flavour of the month at the time. Thankfully I believe those days are largely behind us. Indeed most larger firms have long since identified the inherent risk in letting advisers loose with these decisions which is why most firms now have a centralised proposition of some kind – either setting up their own service or more likely ‘outsourcing’ investment management decisions (with further added cost). And many of these do now embrace Tracker funds to varying degrees. – however, possibly for all the wrong reasons!

You see Tracker funds are cheap. You can put together a sensible portfolio of Trackers for around 0.2% a year. And we came across a national advice firm the other day who had done just that. That is where the good news stops. They then charge an additional 1% a year to wrap their own discretionary service around this. There is also a 1% a year for the financial advice their inhouse adviser provides – plus the cost of a high end platform. They don’t clearly publish all of their fees so some of this is hearsay from a prospective client but that is total costs of around 2.5% a year. The group make a big deal about being a good home for retiring IFA’s and it is not hard to see why. The model is based on plugging in to their inhouse fund solution where the margins are so fat that they can pay generous retirement guarantees to the adviser. And they seem to have worked out that whilst a 2.5% a year is awful it is no more awful that many others so they just about get away with it.

So, in this case, whilst the use of trackers may look commendable it is actually a fairly cynical way to trouser higher fees for the advice firm.

And as usual I have wandered off the point. Suffice to say that I found John Bogle to be a remarkable and intriguing man and have now order another one of his books – ‘Enough – True Measures of Business, Life and Money’. I am sure I’ll feel motivated to blog about it but in the meantime I will leave you with a rather nice John Bogle quote that resonated with Justin and I:

"It was never my intent to build a colossus. I’m a small-company kind of guy…Turns out, when you do what’s right for investors, money pours in".