Influencing Capital Allocation with Karin Risi

Bloomberg Audio Studios, Podcasts, radio News. This is Masters in Business with Barry Ritholts on Bloomberg Radio.

This week on the podcast, I have an extra special guest, the Vanguard Group's Karen reci the person who is responsible for so many initiatives, so much growth, so many new products, including the Vanguard Ria, the internal advisory service that runs three hundred and fifty billion dollars. This is a fascinating conversation if you're at all interested in what it's like to be part of a fast growing organization that is racking up trillions of dollars in assets, what it's like

Thanks for having me, Barry. I'm happy to be here.

I'm happy to have you. I want to talk about your time at Vanguard, but before I do that Bachelor's in Finance MBA from Villanova. Finance always was a career plan. That's what it kind of looks like.

Yes, I think it looks that way, but I'll say I got more intentional over time, Barry, But no, I initially actually wanted to go to art school. Oh real little known fact.

Yes, so we did from Villanova. Do you go straight into the NBA or do you work and then go back?

I worked for a few years at Sinoco in Center City, Philadelphia, and then I started my MBA there and then joined Vanguard and finished up my MBA in my first couple of years at Vanguard.

Really, so right from business school and then the only company you've worked for since school is Vanguard. That's an impressive run. How did you find your way to Vanguard?

Like so many people at Vanguard, I had a friend that worked there, So I was a couple of years out of school in investor relations at Snoko, and then I had a friend who said, you know, if you want to get more into finance and investments, we have an opening at Vanguard. I think you'd really like it. And that truly is how I got into the interview process.

So late nineties, Vanguard had to be a really interesting place. What was it like during that period?

It was an interesting place. It was not an unknown like many of my you know, retired predecessors are. You know, when they joined Vanguard in the eighties, it was really off the radar. We were starting to gain traction. Indexing was starting to gain traction, the hiring classes were getting bigger.

So if you join Vanguard in ninety seven, Jack Brennan.

Is CEO, is that right?

That's exactly right.

A delightful, serious individual and I find him, like every other prior CEO of Vanguard, fascinating guy.

Yes, yes, and you're right a serious individual. Yes, Jack was leading the firm by the time I got there in ninety seven, but of course Jack Bogel was still sort of around present on campus. You know, his whole spirit looms large even today.

And so if I memory serves, it was only a couple of years later Brennan kicked himself up to chairman and Bill McNabb comes in it as CEO. So you worked with some really tremendous corporate leaders.

I did. In fact, if you think about the CEOs at Vanguard I worked. I had a really special opportunity to work directly for Jack Brennan, just for one year on a special assignment working on scalable advice, which we'll figure later into my career trajectory. And then I worked directly for Bill McNabb, our next CEO. I worked for him in multiple capacities when he was running our institutional business, and then again I worked for him directly as a

So you mentioned Jack Bogel. Did you get to spend a lot of time with him? He is Saint Jack is pretty legendary.

He is legendary for sure, not a lot of time. I never worked directly with Jack, but as I I said, you know, I was working on the third floor of the Victory Building, which is where Jack still had his office for a time, and then he moved down to the second floor. So he was very present on campus in my earliest years at Vanguard, but I did not work with him directly.

So you were head of strategy, Product, marketing, Communications? Like, is that one job? Is that four jobs? Tell us a little bit about your progression over twenty seven years through the leadership ranks at Vanguard.

Yeah, that what you just described was my final post at Vanguard, and it was, yeah, kind of like four jobs, but it was one one assignment throughout the twenty seven years though I had, as you know, a bunch of different roles at Vanguard, really strong rotational culture at the firm. So I joined in the corporate division as an investment analyst.

So let's put some flesh on the bones. So when I hear corporate communications, I think investor relations, public relations, just and for It's kind of interesting for most of Vanguard's history, not a very aggressively public firm, kind of a low key firm. Not that Jack was low key, but the firm itself wasn't doing the usual rounds. Isn't out there yelling and jumping up and down with the hair on fire, just very quietly, at least from my observation. Tell me if I'm wrong.

No, I think that's a fair characterization. Jack Bogel certainly was out in the industry and vocal at the firm level. You're right, we didn't do a lot of advertising. We were quite happy to be in Malvern, Pennsylvania and sort of out of the limelight. That was intentional on our part, especially in the earlier years. I think over time we've gotten far more comfortable taking a stand and expressing our point of view. But by and large your characterization is fair.

Product development, that's such an ambiguous phrase. Tell us what product development means specifically at Vanguard.

Of course, for Vanguard, it means investment product development. So I head oversight of our four hundred and twenty plus the numbers probably even greater now, first mutual funds and increasingly ETFs, and we do as you know, all of our passively managed products are our managed in house by our investment management group. But our actively managed funds are

And a lot of people don't realize because you know, Vanguard and Blackrock are synonymous with broad indexing. But am I getting the numbers right? About twenty five percent on the equity side is active or is it even higher than that?

It's about probably just shy of a trillion dollars in active equity.

Uh huh that's real money.

Yeah, yeah, it's real money.

How many subadvisors are you working with? And what is that process like?

Well? Today, I think the number it fluctuates a bit as we add managers to the stable in part ways with some others, but I think the high water mark was probably in the mid twenties. It's probably down to twenty two or twenty three now, you have to check with the team. But when I left, I think it was about twenty two or twenty three different managers. And given the design of the product and the client need we're trying to meet, we look for the best possible active manager to fill that mandate.

So I didn't realize until you just said this earlier. All of the active fixed income is in house, but the active equity is external. What's the difference between the two for our audience? I think I have an idea of the difference in terms of active fixed income has certain attributes that active equity doesn't, but I want to hear it from you.

Well, maybe one minor clarification. Vast majority of our active fixed income is managed in house. Wellington does manage one or two active mandates for us, still legacy mandates like Jenny May, et cetera. But really the difference being Vanguard chooses to manage funds in house where we have the talent and expertise to do so, and active fixed income. Our bond desk is tremendously deep in talent. Greg Davis, who I know you've had on the show before. He's great,

At risk of oversimplifying this, it always feels like active fixed income, you can run a screen and screen out riskier product, riskier bonds, lower quality bonds, and that immediately accrues to outperformance. For an active bond portfolio, you could develop screens to select certain quality bonds that you have, certain return characteristics that you like. Am I wrong? And I always feel like I'm making I'm dumbing it down

I think that's fair, and I think Sarah Dever, who runs our fixed income shop at Vanguard now, would agree with you. I think there's a lot of opportunity that the team sees based on what's happening in the environment. And perhaps I don't know, I'm not in a position to say relative to active equity. I don't know if our active equity managers would agree, but I know that Sarah's team would agree.

You mentioned that Vanguard is headquartered in Melvern, that it was a purposeful decision not to locate and headquarters in Boston and New York City. What are the advantages of that, How does that accrue to the culture.

I do think it plays a big role in our culture, especially over decades. I think it's a big part of in some ways the talent we attract. There is a very purposeful decision on the part of most people in our industry to in many cases relocate their family to the suburbs of Philadelphia. Many of them are coming from New York or other areas, And you have to really buy into the mission and purpose of Vanguard and its company and its culture to you know, make a consequential

And to be fair, Philadelphia is a great American I I agree. Every time I've ever gone to Vanguard, I've always arranged a weekend in Philly. It's always a blast. The food is great, the history is great. It's not like nothing is New York. But I would put Philly in Boston, you know, absolutely on par in terms of, hey, we have this great city right here.

I would agree with you, Barry, And I think from a Vanguard culture perspective, it also allowed us to really instill in you know, now twenty thousand crew around the globe, but those of us in Malvern for sure. This notion that our culture is really reflection more of Main Street than Wall Street. You kind of hear that around Vanguard every now and then, and it speaks to the clients that we serve and the way we think about product development and all of the rest of it.

Huh, really interesting. So I mentioned Vanguard is about to celebrate its fiftieth anniversary. By the time the sales it's already happened.

That's right.

That's a nineteen seventy four was when it was launched. That's an amazing run fifty years. What does that mean to affirm the size of Vanguard?

Oh, I think it's you know, an important milestone. But it is a reflection of everything that Vanguard has been over the last fifty years. I think, you know, our culture, our mission, our purpose has been incredibly consistent from the top down, you know, modeled by every leader you mentioned, the CEOs of Vanguard that you have already had the pleasure of talking to.

Got to get the new guy in.

Yeah, you got to get the new guy in. But you know, there is just a remarkable consistency across what we try to do for clients and how our leaders express that and how our crew you know, feel that and reflect that to our clients when they serve them every day.

So I'm going to share a Bill McNabb's story, which I'm sure you experienced, and I want to just get your reaction to it. He told the story here during the financial crisis, he would occasionally plug into the phone system and listen to advisors speaking to clients, and not only were the clients freaked out, but you could hear people on the phone. They were a little nervous. All hands on deck, phone call, Hey, listen, We're going to

Very similar to what you just described and very consistent with how Vanguard approaches crisis. Really, I mean, the GFC was definitely qualified as a crisis for our firm in the industry and investors, and there was a calmness coming from Bill as the CEO, but also the rest of the leadership team and providing assurance to our crew. And You're right, there was, you know, an explicit assurance that we were going to keep calm and carry on and

That's how he told it. And I'm not surprised that at your reaction. I mentioned Jack Brennan, Bill mcnah have another rock steady guy that's whose hand you on on the tailer. You know, this guy isn't going to be rattled by a market sellof or a crisis, and that's

Yeah, I'm not going to check your math on that, but I'll buy Eric's and your your estimate there on what we've saved investors over time. And I think the focus on cost has been relentless, something that is in the fabric of the organization. We counsel our investors and our clients to focus on the things they can control, and you know, expense ratios, whether it's mutual funds or ETFs, these are things that are within an investor's control and

You see feed compression imediately when Vanguard shakes everybody's cage.

Yes.

So it's funny because Eric eventually writes the book the boggle effect. You mentioned. Cost isn't the first principle. I kind of get the sense then, of the things that you can control. It's being a long term investor and being a buy and hold investor. That wasn't popular when Vanguard launched in nineteen seventy four, was it.

No, Sometimes it's still not even popular today. But we've been pretty clear and steadfast in our view that investors

So I want to ask you a question, and I'm very cognizant of the fact that you are no longer with Vanguard. We'll talk a little bit about where you've went. There has been in the industry as a whole, but surprisingly at Vanguard also a move towards some privates some alternatives. Tell us about this evolution.

Yeah, I think it's an exciting one, both for the industry but also for Vanguard. As you mentioned, we began offering in twenty twenty. I think we began offering private equity fund to some of our retail investors, those that were qualified for it. It was a first for Vanguard, but I would say the notion of broadening access to different types of investments for mainstream investors is not a first.

And where did you end up shifting after twenty seven years.

Well, I'm still making the shift, you know. I'm still kind of writing my next chapter, which is really exciting. But I will be joining Harborvest Partner's board next month.

So May, first, you're at harbor Vest Vanguard, did I want to say Experiments which they've expanded, which was working with harbor Vest, which you know, maybe the layperson knows Vanguard, but they don't know harbor Vest. They're one of the biggest private equity in private credit shops out there, right, tell us what are you doing at Harborvest.

Really excited to join harbor Vest in May. I'm going to be joining their board, really getting to know the firm in a different capacity. When I was at Vanguard, of course, in twenty twenty, we partnered with Harborvest. I oversaw the team that actually selected Harborvest among multiple managers that we considered for our first private equity offer for both retail and ocio clients at the time. So multiple series or vintages of that fund have progressed and Vanguard

So this raised this's a fascinating question. There has been a giant shift from public to private assets over the past you know, certainly decade or so. Not everybody can be in the top ten percent, as the joke goes, but it seems like there's almost a land grab going on for the retail investor thinking about a traditional sixty forty portfolio, why should they also be thinking about adding a slug of private debt or private equity to their portfolio.

Yeah, I think it's one of the next things that we as an industry, not just vanguard, but more broadly, advisors have to help clients with retail clients in particular, who are used to, as you said, at conventional sixty forty public portfolio, really thinking about is first is there a role for privates in their portfolio construction? And then if yes, if appropriate, then how they should integrate that into their portfolio, and then which manager they should do

So, let me ask you two questions about that, an easy question and a hard question. The easy question is, Hey, is this about non correlated diversified returns or is this about generating alpha and outperforming markets at public markets?

Yeah? I think it can be both. It's a really good distinction. I think it can be both. It depends on your wealth level, It depends on how much of your overall allocation you're going to put into privates, and then what type of private market asset class you're going to be working with. So yes, I think it can be an uncorrelated return opportunity and also an alpha generation opportunity.

So now the hard question. Vanguard built its reputation on low cost alternatives, have a reputation of being pricey, So how do you square that circle?

I think it's going to be a matter of you pay different things for different asset classes, and private market investing is different than public market investing, so I would imagine that investors should expect to pay more for a private equity offer or a private credit offer. The key for me, you know, and again speaking personally, would be I want to know that I'm getting a top quality

And that's the Vanguer culture, even spilling over into private So we've come to know Vanguard not just for passive, not just for indexing, not just for stocks and bonds, but generally a putting clients first, A fiduciary approach to asset management is that consistent with some of the criticism we've seen of the alternative space, or is it simply as much as not all alternatives are created equally.

Certainly, not all alternatives are created equally. I think you could say that for sure, And I think with regard to what Vanguard endeavors to do, it'll be up to the current CEO and his leadership team. But I would suspect that they will stay true to the notion of trying to provide clients with the best possible offers that meet their long term investing needs. And I do think that there is a place for private assets in that, but that'll be up to the current team to decide.

Really really fascinating. So I read a crazy stat that in the state of Pennsylvania, if you are a certified financial planner, ninety three percent odds that you work for Vanguard. Can that possibly be correct?

Again, I'm not going to check your stat but I think yes. Having built out the personal advisor offer from the ground up and passed it on to multiple of my colleagues since then, we're now well over I think a thousand advisors for sure, so it's possible. Luckily, we have other domestic offices. Not just Pennsylvania, there's also Charlotte and Arizona and Dallas, so we can we can attract talent in the CFP ranks from multiple spots.

So I have to ask you. You're working at this giant shop and you say, I know, let's build an RIA, your registered investment advisory firm that's a fiduciary within a giant asset manager. Tell us about the genesis of this.

Yeah, well, definitely not my vision alone. There was. It was a firm wide kind of push. For sure. We had been this is going way back. We had been chasing scalable advice for decades. At Vanguard. We had an offer very small relative to you know, the firm size at the time. It was called Asset Management Services. The minimum was five hundred thousand dollars to invest. You got a one on one dedicated advisor, much the same way you do today. And I think we charged back then, Barry,

Huh, that's really fascinating. I know Vanguard has a direct indexing product now, it's kind of fascinating to look at all these different product lines and divisions because in the early days Jack Bogel didn't want to do ETFs, didn't want to do international. Hey, we do one thing, we do it really well, and everybody else can can play catch.

Up, and you can add advice to that list. He didn't want to do advice either. In fact, oh for sure, we had thousands of frontline phone associates who were told do not use the word advice. You know, there was definitely a very clear line between guidance and advice, and we were very careful to step back from the advice line, if you will.

So what's the difference between guidance and advice?

Well, there is a regulatory difference, for sure, and that's what we were homing in on at the time.

But well, you have discretion, right your fiduciaries. Yes, so I don't see the difference. Listen, if you're giving your child advice or you're giving them guidance, maybe guidance is a little gentler.

Yes, guidance is gendler. It's there is definitely a difference. But you know, I had in earlier in my career, I led phone groups, you know, hundreds of phone associates and we would train them to serve the client's transactional needs and help them with guidance. But I cannot tell you.

Totally self directed.

Totally self directed is really the legacy of the firm. You know, we still have a much greater cadre of self directed clients than advised clients. The vast majority of vast majority of vast majority of clients.

Although I say this as an RIA I know the RIA side of the industry are big buyers and supporters of Vanguard products.

Oh for sure, I mean I would acknowledge that the RIA channel, for sure is it's a totally different division at Vanguard, but it is absolutely critical to our success and growth over time. What we've been talking about is really that direct relationship when a client, you know, opens a mutual fund account directly with Vanguard and then that is essentially what what I'm referring to as self directed.

And when this first rolled out, there was a little rumbling. I think Vanguard managed to thread the needle and say we're not offering advice, we're offering guidance and not exactly competing with that channel.

Well, we were offering advice, but you're right that there was a little bit of needle threading to do. I think partially we were able to do that well because there was so much internal collaboration across the senior leaders

So here's a crazy stat I want to throw out at you. So total investible assets of stocks bonds were not quite one hundred trillion, but where it's not that far off in the United States, how is it possible that nobody in the RIA space has market share? You guys are three hundred and fifty billion dollars And it's like, eh.

Well, there are some pretty big and very strong independent arias and we serve a lot of them. Their clients a vanguards. But you're right, it's a it's a fragmented market. Still, there's definitely a top tier for sure.

All right, But there's ten firms with yes, you're one hundred billion, two hundred billion, and a ton of firms with twenty forty sixty billion. And it's funny when I discuss these numbers with family, they think five billion is a lot of money. I'm like, oh no, no, we're peons. They don't really, they don't really know what trillions are, but why is the industry so fragmented?

You know, I don't know what the why is behind that, but I can certainly say, just in the time that I've left Vanguard, all of the conversations I've had around the industry, there is a ton of interest in and you see it yourself, all of the consolidation that is happening among all of those mid and smaller tier rias. You know, the larger firms the top tier are either

And there's some crazy number the average advisors age is like sixty six. So there's a whole succession planning.

Yeah, that's the other thing, You're right, the demographics. It's you know, lots of rias are you know, looking to turn over their book and they don't have a strong succession plan.

Huh.

That's really fascinating. So one of the things you launched at Vanguard there's so many different initiatives you did, but the Vanguard Women's Initiative for Leadership Success. Tell us a little bit about that. What led to this project and what have the results been.

They call it WILLS internally at Vanguard, and you're right, it's the Women's Initiative for Leadership Success. It was spearheaded under Bill mcnath Leadership and I mention that because it is so important that top down the CEO made it a priority, and I think that's why it continues to

What sort of advice would you give to a young woman aspiring to a leadership role in the world of investing in finance?

If I think particularly about the advice and counsel that I have given to many younger women in the organization, I often will say, don't be afraid to take a risk. You know, do the work, develop a point of view, have your own point of view, and be willing to share it. That's you know, there's often a confidence gap. It's not an aptitude gap.

But men blunder in regardless of their competency. Women are much more circumspect. Pardon me for man's blating sexism, but like my observations have been, man as a as a dude, I I'm out over my skis, I have no radio training. What am I doing here? And I've noticed since I've been doing this that men just seem to be we are blithe idiots stumbling into things, and women seem to be more thoughtful in circumspect.

Those are your words, so I'll just say yes, I find many times men are infinitely comfortable sharing their point of view regardless. Yes, but I think women can often use some encouragement to, you know, want one do the work, develop the point of view right that there is work to be done. But once you have a point of view, take a risk and share it and know that it's okay.

So let me throw you a curveball. You served or you are serving as a director on the Vanguard Foundation board.

I did serve as a member of the Vanguard Foundation Board when I was at the firm. I also served as a member of the Irish Funds Board, and I also had the opportunity it's separate from Vanguard but related, I also served on Vanguard Charitables Board for a number

And that's a big that's like eighteen twenty billion dollars something like that. That's a big chunk of money that people are saying, help us distribute this philanthropically exactly right, huh quite fascinating. All right, let's jump to our favorite questions, starting with what are you watching these days or listening to? What's keeping you entertained on the What am I watching?

I would say, hacks is Do you like it? I love it?

We not only do we love the show, but we watch it straight.

You know.

At the end there's a little podcast discussion, yes, by the showrunners and the creators, and they're just charming to lifeful people.

Yeah. Yeah, for those that don't know, I think it's worth a It's very different from anything you see on TV right now. Gene smart Is, you know, talk about longevity in a career. She's in her seventies. I love seeing that, and it's just a darkly funny, you know, mentorship between one character and a much younger characters. It's a good one.

Tell us about your mentors who helped shape your career.

Man too many to count. At Vanguard really just spoiled with lots of great leaders, all of whom were mentors in different ways, particularly in the very early days of my career, people like Jeff Moltor taking a chance on me, giving me my first job at Vanguard when I was not an obvious choice. Really helping me develop a thick skin.

Really really interesting list. Let's talk about books. What are some of your favorites? What are you reading currently?

Well, favorites for sure. You can't spend twenty eight years of Vanguard without the required reading. A random walked down Wall Street I think was dropped on my chair truly

The financial crisis not but a decade later. Correct, all those lessons were totally ignored. If anything, maybe it made people too cocky. You don't worry about it, The FED puts.

Yeah, yeah, yeah, that's a fair point. What am I reading now? I just finished, and I'm like way behind the times because a million colleagues had suggested I read Outlive by Peter Attia M h. You know it's been on the bestseller list for multiple years now. Yeah, but fascinating to think about the longevity and the notion of health span versus life span. Looking inwardly for each person. I have some work to do to live to one hundred, but I'm gained for it. And the book on my

And the conversation the way the math works, if you make it into your sixties without dropping debt of a heart attack or whatever, the odds of hitting mid eighties or beyond go up dramatically, yes, And so suddenly the question is, hey, have I saved enough money if I'm going to be around to eighty five ninety. It's a genuine planning issue for anybody thinking about their financial future.

You're right. I remember when we first started the personal Advisor offer and we were creating the advice methodology, we conservatively. You know, our planning horizon was to one hundred years.

Well, Evan Monte Carlos, that goes to one hundred.

Yes, And I cannot tell you how many clients at the time said that's insane, I'm going to drop that at seventy or eighty or whatever, and they would fight with us. And now it's you know, it's not inconceivable.

That doesn't surprise me at all. Our final two questions, what advice would you give to a recent college grad interested in a career in wealth management or personal financial guidance?

I would say, for sure, pay attention to the company and the mission and purpose of that company. Be proud of the company you work for. Worry about that more than the job or the starting salary. Think hard about the company that you want to connect yourself with. I mean, it's it's unlikely that many college grads are going to have a twenty eight year run at a company like

And our final question, what do you know about the world of wealth management and investing today That would have been useful in nineteen ninety seven when you were first getting your feet wet.

Yeah. Well again here I feel like a bit of a ringer because not many twenty three year olds have the benefit of people like Jack Brennan or Bill McNab, etc. Telling them explicitly. I remember sitting in the office with Jack Brennan and he said, all you need to do

Well, thank you, Karen for being so generous with your time. We have been speaking with Karen reci formally of the Vanguard Group, now on the board of Harbor. If you enjoy this conversation, well, be sure and check out any of the five hundred and fifty we've done. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you find your favorite podcast. And be sure and check out my new book How Not to Invest The ideas, numbers and behaviors that destroy wealth and how to avoid them How