Vanguard, Virtual Long Before It Was Cool, Leverages Mobile Technology, Multi-Media, Voice Biometrics

Originally published April 13, 2009

The Vanguard Group, a pioneer of the index mutual fund, is known for its conservative investment model and for its philosophy of considering clients enterprise partners. Conservative only in its investment philosophy, Vanguard has repeatedly been a leader in technological innovation over the years, dating back to toll-free numbers when those were considered a new way of doing business in the 1970s, and now looking ahead into the potential within mobile devices as a means to educate and inform clients. A key part of its business model is extensive use of index funds to reduce managerial costs, but the investment strategy also embraces the use of external advisors on some funds. Global Investment Technology spoke with Paul Heller, Managing Director and Chief Information Officer, The Vanguard Group, who has nearly 25 years’ experience at the firm.

GIT: What types of business issues have assumed new importance for buy-side firms in the global economic crisis?

PH: Regulation has been raised in importance. Vanguard and mutual fund firms generally are aligned with Main Street. There isn’t leverage, deals, and the like. There is a lot of work being done around money market funds, in which our Chairman, Jack Brennan, participates, through the Money Market Working Group of the Investment Company Institute (ICI), which recommended minimum liquidity standards [see Industry Alert, Global Investment Technology, March 30, 2009]. Our business is largely retirement oriented. More than half our assets are held by people saving for retirement, whether it’s 401(k) plans, IRAs, or simple 401(k)s. In the heat of the current crisis, there’s a lot of talk about whether the system works or needs to be amended. Mutual funds as an industry have done really well for people. They have been highly regulated and well-regulated. There really haven’t been big problems in mutual funds. While there’s a lot of talk about money market funds, the industry has existed a long time and doesn’t have the symptoms being seen on Wall Street.

GIT: What are some of the challenges related to technology and operations that you see the current crisis has raised?

PH: People tend to react or even overreact to the markets, but less so at our firm. We tend to attract reasonably long-term shareholders. If the markets are way up for any reasonable period of time, volumes surge. People go to the Vanguard website and they call us. There were huge surges in volume related to market activity. For IT, since most Vanguard business is done online, we had Six Sigma events where in 10-minute periods, we had to handle enormous variation from normal volume. We handled it well and are proud of that, but it was a challenge. The other challenge is we’re increasingly storing extraordinary amounts of data. That places real demands on data centers. It’s complex and that technology changes quickly. We probably use about 500 terabytes of storage for data. Just a few years ago, it was probably about 200 terabytes, and it took a long time in business to get to that figure, but now here we are at 500. That’s a function of a lot of regulation. Everything needs to be stored and kept for retrieval forever, or at least for a very long time.

GIT: Some people have been saying in the current environment that mutual funds are an endangered species.

PH: What do they think is the better product? Where are people going to put money? There aren’t that many asset classes. Mutual funds are simply a diversified way of buying into the stock, bond and money markets. I don’t think there’s a new, great appeal to just putting the money in banks, insurance products or real estate. If anything, mutual funds will emerge even more strongly out of all of this. If you can invest in a broadly diversified low-cost fund, it’s a pretty good way to create wealth. Hedging is not evil, but it’s always a bad idea for high-net worth individuals or institutions to buy products they don’t really understand. A lot of hedge funds have gotten into trouble and you just haven’t seen that in the highly regulated mutual fund space.

GIT: With 25 external advisors, there are technology issues in monitoring and coordinating assets and reporting for your clients, as well as risk management. What technology projects are on your front burner?

PH: The broad risks are addressed by a few different projects. Vanguard doesn’t have to lead in technology in many places, but we do for web security. We invest very heavily in ensuring that our shareholders’ data and assets are safe. There are plenty of people, unfortunately, trying to figure out how to break into shareholder accounts at banks, insurance companies, and mutual fund firms. Our most interesting key projects are much more shareholder-visible. We have an opportunity or maybe an obligation to make investing a little bit more straightforward and simpler for our shareholders. We try to do that largely through our website and the products we offer. For example, target retirement funds have experienced a ton of growth and they are very straightforward and simple on the surface, but actually quite sophisticated under the covers. Our retail website cuts through all the hype to create clarity for shareholders. I don’t even think of financial services firms as the competitive set. Increasingly, the competition is who has the best website or feature, such as a video. We’re spending heavily on the client side to ensure that we offer a fabulous interaction with our shareholder base in the service dimension online.

GIT: How are you leveraging mobile technologies?

PH: Our clients tend to be long-term buy and hold. In financial services, the early adopters have been buyers and sellers, such as traders and brokerage accounts. That’s not a client segment that we go after, because candidly we think it’s a really tough way to create wealth. There’s still a lot we can do in the mobile space. While most of our customers do tend to interact on a large screen device, through their PC, more and more we are seeing people come in through their Blackberry, iPhone, iTouch or other devices where they’re just trying to get some quick information — maybe what the markets are doing or what’s happening in their specific portfolio. We are moving into that space.

Increasingly, we’re not going to be walking around or taking business trips with laptops anymore. People will settle for doing that through a much smaller screen on their phone, Blackberry or other device. We absolutely are investing in that space, but it’s not a place where we feel we need to lead because most of the leadership today is really in the transaction space. The good news is most of the time our customers aren’t going in and doing something — they’re not buying and selling.

GIT:What special features are you developing intended for mobile devices?

PH: Right now, it’s mostly information. You can certainly do a transaction on the Vanguard site [using a mobile device]. Because Apple’s iPhone and iTouch have good screens for watching videos, we can do quick educational videos. We’re not trying to sell customers something they don’t need; we’re really trying to help them by providing relevant information. If we know their age and whether they have kids, we can tell that it could be a very good time for them to invest in a 529 college savings plan, so we can provide content relevant to that, such as two-minute video clips. Or if we know the client is quite wealthy and would be interested in tax-advantaged investing, we can provide a video clip on that. We’re doing more of that interactive multimedia with our fund managers and experts.

GIT: What are some of the technologies that you are watching, even if you are not currently utilizing them? What’s the importance of these technologies?

PH: We’re fast becoming a multi-media firm. Even three years ago, if you went to, you would find a lot of text, and classic HTML text — click on it and get to more text. But increasingly you will find multimedia there, such as podcasts, videos and rich web pages. This really morphs firms like ours into being far more media-oriented. The content has to be fresh and relevant. The content has to be authentic and interesting because there’s so much competing in that space. That’s really a big push for us. There’s a lot of technology under that and that technology is changing very quickly. There will always be engines that drive big platforms. But as you move further out and get closer to the user interface and the web, what’s legacy changes very quickly. What we were using for our first rich Internet apps two years ago was already quite different. We’re moving in a service-oriented architecture. It’s evolving very quickly.

GIT: How have you addressed needs related to risk management from a technology perspective?

PH: We really always have had terrific risk controls in the financial space. We have tools behind the scenes that know whether you’re both logging in and calling us, what you’re doing and what your pattern of behavior looks like, and whether we should challenge it. We’re rolling out voice biometrics on the phone. It’s a technology war to keep out in front of that.

GIT: What’s your vision of what the asset management business ought to look like by 2015? What’s needed for the industry to reach there?

PH: The asset management business is so large with so many different segments. We compete on the retail side of our business in the direct space. Those who think about and are interested in investing know about that and like it. In that space, we have an incredible wind in our sail. Vanguard is so fortunate. We were virtual before it was even cool. Now our website can allow us to be with our clients who could never visit us. They can actually see us via video. They can collaborate, chat and increasingly will be able to interact with us anytime, anywhere on small devices. Customers’ ability to interact effectively with their service providers will grow exponentially. The bar for great service will rise. Five years ago, if you logged onto a website and it wasn’t available, that was it. Now, of course, not only do the sites have to be available, they have to be instantaneous and really snappy. Everyone expects to be able to chat, collaborate and see video, and deal with a community. That really works well for us. As I look into the future, we’re very well positioned as a firm, and even more broadly as an industry to help people who are investing get more relevant, engaging, authentic, interactive content that helps them.


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