Can CEO Salim Ramji Improve Vanguard's Service Without Raising Fees
Vanguard, with $9 trillion in funds, has strayed from its founding goals of low-cost investment access for all
(Photo: Salim Ramji, CEO Vanguard.)
July 21, 2024
Early this month, Salim Ramji took on his biggest career challenge as the new Chief Executive of Vanguard Funds. Based in Valley Forge, near Philadelphia, Vanguard is the second largest U.S. fund manager, investing $9.3 trillion across 423 funds for more than 50 million clients.
“When Jack Bogle founded Vanguard in 1975…investing was the exclusive preserve of large institutions and the very wealthy and even then at extremely high fees,” Ramji, 53, wrote in a post on LinkedIn, earlier this year, when he accepted the job as Vanguard’s CEO. “Vanguard relentlessly challenged this orthodoxy by lowering the cost of investing, reducing the barriers to access and adopting a business model where investors were owners and the company’s singular focus…”
“I believe the revolution to democratize investing has never been more important than it is today. Millions of people are seeking convenient, low-cost ways to invest soundly – in the investments they hold, the advice they receive and the technology they use – from a company they trust to look out for their interests….That’s why I am so excited today to officially join Vanguard,” Ramji noted.
Apparently, Vanguard’s board brought in Ramji as the first CEO from outside the firm in an effort to turnaround the performance. Ramji’s major challenges are to continue to offer a wide range of low-cost investment products; quickly make Vanguard’s mobile app and online platforms easier for customers to use; and improve service, all without raising fees or charging new fees.
Earlier, from 2014 Ramji spent ten years at BlackRock, the largest U.S. fund manager with $10.6 trillion in assets, including retirement accounts for more than 35 million American investors. There he oversaw the exchange traded funds (ETF) and index products business, which make up the bulk of Vanguard’s assets. So, it should be relatively easy for Ramji to figure out how to maintain and grow Vanguard’s ETF and index product offerings.
Some Vanguard customers, who use its mobile and online platforms, suffered errors and glitches. Vanguard spends roughly $1 billion a year on technology. While Ramji does not have technology skills, he ought to be able to find within Vanguard, or hire from outside, technologists who can improve the apps and platforms.
The big challenge Ramji faces at Vanguard is improving service, especially for its full-service customers who call by phone to place their trades and make changes in their accounts. In 2023, Vanguard ranked 13th, at the bottom, of the J.D. Power U.S. Wealth Management Digital Experience service rankings for full-service customers; with Citigroup, J.P. Morgan, and Fidelity at the top. Vanguard also ranked near the bottom - 10th - in a J.D. Power’s survey of self-directed accounts.
Part of the problem is that Vanguard’s customer service representatives are available only from Monday to Friday and that too from 8 am to 8 pm. Its low-cost rivals Fidelity and Charles Schwab offer 24-hour service seven days a week. If Ramji launches seven-day, 24-hour service, Vanguard’s operating costs will rise substantially.
A customer service representative, at giant fund management companies such as Vanguard, needs to have a grasp of the terms as well as the investment objectives of the wide range of products that the firm offers. Hiring and retaining such quality reps is expensive since it requires paying above average salaries, plus the cost of regular training for new products and updates.
Ramji has little room to cut costs to invest in improving customer service since Vanguard already operates at a very low cost. The annual average asset-weighted expenses for Vanguards’s U.S. funds is 0.08%.
Since its founding, Vanguard believed “aggressive cost savings can increase an investor’s overall chance of success. That’s because every penny that goes toward an expense ratio or brokerage fee must be overcome through investment gains before an investor will see any rise in portfolio value.”
This focus on cost cutting was due to Vanguard’s unique ownership: it is owned by the funds that, in turn, are owned by the funds’ shareholders. In short, it’s a company owned by the investor and for the investor.
In 2014, Ramji joined Blackrock, New York, as Global Head of Corporate Strategy. Earlier, from 1998 to 2014, he was at McKinsey & Co, New York, including as a senior partner and head of the consultant’s asset and wealth management practice. Ramji started his career as a lawyer at Clifford Chance in London and Hong Kong, 1994-1998.
He serves on the international leadership council for the University of Toronto; he earned a bachelor’s in economics and politics from the university, 1988-91. He earned an M.A. in law from Cambridge University, 1991-93 and is a CFA charter-holder.
Ramji grew up in British Columbia, Canada, spending summers working in his father’s grocery store. In school he won numerous debate competitions. His parents, who are of Indian heritage, moved to Canada from Tanzania. Ramji’s family are Ismailis, a Muslim community whose spiritual head is the Aga Khan.
While his parents did not finish high school, they drilled in Ramji the importance of going to college and financial security. His mother always saved money, even $100 every month, in a retirement plan. It was a signal that “times may be tough but there is good hope ahead. I always liked the idea of investing being a sign of hope…betting on a future being better,” Ramji told Jon Schultz in a video interview.
Ramji ended up in finance “by accident.” After law school, he initially wanted to work at the World Bank, being interested in economic development. But he needed field experience to get a job at the World Bank.
After law school, during 1993-1994, Ramji worked at a community-based microfinance lender in the North of Pakistan, the poorest region in a poor country. The lender was apparently funded by the Aga Khan Development Network. It made small loans of $1 or $2 to locals to start a chicken hatchery or plant fruit trees, while also teaching them how to save and invest. Ramji saw that even for the very poor, knowledge of finance “could have a transformative impact on their lives and livelihoods,” he told Schultz.
In 2019, Vanguard set a goal to return an additional $1 billion in value to shareholders by the end of 2025, by reducing expense ratios and lowering fees across its investment lineup. But, apparently the continuing cost cuts led to a shortage of funds needed to improve customer service and invest in technology.
Recently, prior to Ramji’s taking over as CEO, Vanguard started charging various fees and abandoned one of its founding goals to “democratize investing.” It’s fees include annual fees for each Vanguard mutual fund in both regular ($25) and retirement accounts ($20); $25 fee for each buy or sell order for Vanguard ETFs and mutual funds placed over the phone with a broker; and fees for account transfers and closures.
At the same time, Vanguard waives fees for customers with substantial assets thereby setting up two classes of investors. For instance, it charges no annual fees for mutual fund accounts where a shareholder has more than $5 million in total assets at the firm. And there are no fees for placing Vanguard ETF and fund trades with brokers for shareholders with more than $1 million in total Vanguard assets.
In addition, Vanguard reps try to persuade clients with more than $50,000 in assets at the firm, who call in for customer help, to shift to working with the firm’s personal financial advisers. Vanguard also offers dedicated personal advisers for clients with more than $500,000 in assets. The annual advisory fee in both cases is 0.3% of assets.
Vanguard’s fees have led to numerous customer complaints, especially given its original focus on low-costs and serving all clients equally, and, since rivals like Fidelity do not charge many of the fees. “New fees and rules have,,,left (Vanguard’s) customers feeling nickel-and-dimed,” noted The Wall Street Journal.
Vanguard has had no employee layoffs. Both BlackRock and McKinsey, where Ramji worked earlier, are known to sharply focus on raising employee productivity mainly through cutting staff. So, at Vanguard, Ramji faces a new business culture where he will likely be unable to increase productivity through firing employees. He may try to raise productivity through increased automation.
On the day he assumed the CEO role, Ramji posted a message on Vanguard’s site to its clients and 20,000 employees in 21 offices, including 13 outside the U.S. He makes no mention of cost cuts, raising fees or charging all clients the same fees, irrespective of the size of their assets. “I have three areas of focus,” he says. “First continue delivering for our clients…” Second, never deviating from founder Jack Bogle’s original focus of “taking a stand for our investors and giving our clients the best chance of investment success.” Finally, Ramji states, anticipating client needs and continuing to evolve capabilities to serve them well.
Will Ramji continue to raise fees for most Vanguard clients, except for the wealthy clients? Or, can he find other ways to maintain Vanguard’s low costs, avoid fee raises for all clients, and improve its service?