Eric Balchunas: The Bogle Effect

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Welcome to neurotarmit Podcast. Today we're going to be talking with Eric Balcunas, the Bloomberg Senior ETF analyst and funds products buy specialist. We met at the Bogleheads Conference and he's joining us from Center City Philadelphia. We're going to discuss Eric's book, the Bogle Effect, also the wealth universe, ETFs and the future of advice. So with that, Eric, welcome to our show. It's great to have you join us.

Great to be here.

Yeah. No, I appreciate your time. It was great hearing your talk at the Bogleheads Conference. And you know, I was really impressed with kind of like the insights you had about Jack Bogle and the story about Vanguard and how I created and the influence on the overall market. You know, before we dive into that side, I would just, I would love to get your take on kind of how you got started in the investing world and you know what, what drove your interest in this space.

Yeah, so I went to Rutgers and I was enrolled in the School of Sciences. I didn't know what I wanted to do, to be honest. And I went to Chemistry 101. I got through biology, went to Chemistry 101, saw the syllabus, and I walked out. I was just like, I just can't see a life in the science like this. And I respect anybody in that field. It's really, really takes a lot of hard work and brains to be there. But it wasn't for me. I needed, I just needed something that was a little more exciting and simple to comprehend, I guess. And so I ended up writing for the school newspaper, the Rutgers Targum Daily. Targum, it's called. And I love that. I loved writing articles and at the same time, I took an Econ 101 class. And that clicked, you know, sort of macro and microeconomics. It was like, it showed me how everything worked and it just made sense more than the sciences did. And I was like, okay, I'll do journalism and communications and I'll minor in environmental economics. I did, and then I applied to Bloomberg right out of college. I was like, that's the perfect place for me. But I got rejected. So I ended up working at Institutional Investor as a reporter. I covered mutual funds there. That's important. Later, and then two years there. Then I worked at a PR firm because I met a PR guy and I was like, this looks like a cool job. You're closer to the real truth. And so I did that for a while at a crisis communications firm. Funny story there. One of our clients was Long Term Capital Management. And so I got to do the media training for John Merriweather and a couple other guys. And they were not happy when we did it. They were polite but very serious. And that was interesting. And that was a pivot point for me, you know, because that's a classic case of like how hard active is. Because these guys were all like PhDs and like the best of the best and. And they couldn't do it. They had problems. Anyway, so then I went from pr. I got a job offer from a headhunter for she came to me with two jobs. That's how good the economy was in the 90s. A 26 year old would get headhunted. I got PR jobs at two places, Bear Stearns and Bloomberg. Thank God I had the brains at the time to go oh Bloomberg, of course. And I told her I tried to get in before and I'd been to the office once and it was a cool office anyway, so I got a job at PR at Bloomberg, did that for a couple years, then went to data because I moved back to Philly so they have a data office in New Jersey. So I did data for 12, 13 years. And then having been a communicator, I got ETFs as a coverage area in Bloomberg data in 2006. Ish. And I was like holy moly, these things are going to be the future. I knew mutual fund. So when I saw the ETF and I kicked the tires on it, I'm like, this thing's like six evolutionary steps beyond the mutual fund. I'm going to basically gamble my whole career on this thing. And so I became the in house ETF expert. Then when Bloomberg started a research department, the head of research had seen me do some TV spots or talk about it. So he'd start to come to me asking me for what ETF to use for a certain trade, probably for his personal account. And so then he hired me and so I was hired to lead up the ETF research for Bloomberg Intelligence, which I've been doing for six years. And so that's those sort of the. I like to tell people my job now takes all three of those career paths into play. Reporting, right news, you know, idea and sources, they're very good data and priority now days. If you are a writer or any content creator, you've got to market yourself and your stuff. It's so much content. So I am happy. I Had that skill. So now I sort of am able to use all of those experience points in my current job.

That's awesome. It's funny that you worked on Long Term Capital Management. I met Bob Merton. He's actually been on this podcast. So I think that's kind of probably like the low point of his career. But otherwise he's won the Nobel Prize. And we think a lot alike about the focus for retirement being around income versus Assets or it needs to be much more in Income versus Assets.

Just funny sidebar there as well, there's a guy who worked at Long Term, Victor Pagnani, and I think I might have. His last name's close to that. Smart guy. He now runs a small advisor for mostly family and friends, but it's all low cost ETFs because I interviewed him for my last book and because I read an article in the Journal about this guy's road from active manager to low cost ETF guy and it was kind of interesting. So. Yeah, but that experience, even though it didn't go well, had to have been pretty exciting to work there.

Yeah, no, it was a moment in time and I think at the point, it was one of those moments where they're like, oh, you could brand the financial system you've put so much leverage on. You know, they, I think they then they pull everyone together into one big meeting overnight and they're like, hey, we need to make sure that everything's going to keep running in the morning. So anyway, one of, one of many financial crises that we have lived through and we'll probably continue to see. Actually had, I was doing a podcast with Burton Malkiel yesterday and so, you know, he's for the 50th anniversary of his book, you know, random walk down Wall street and it's just interesting hearing his, you know, his side of the world. I mean I actually met, well, I saw him on video. Met you in person at the Bogleheads Conference. But you know, yeah, you get, you can get a pretty interesting perspective, you know, hearing from someone who's, you know, I mean, he's 90 years old, right. So he's seen a lot.

Yeah, no doubt. He's really great. I also interviewed him for my book and he had some really great stories about Bogle. But also just generally speaking, like he's, he's just a really big advocate for passive. You know, I asked every, I asked a couple of people this question in my book, which is how big could passive get before it like the market stopped working? Right. Because that's something people are worried about. And he was probably the most aggressive in how big it get. I think he said 95% he and you know right now it's maybe 30. So we got a long way to go before we hit his limit. Although others were a little more, their bar was a little lower. But most people were over 80.

Right. And I think what are we at now, 50% or something like that?

Well it's 50% of funds are passive, but funds only own 40% of the stock market. So we'd like to say that passes about 20% via funds but probably you add 10 more percent for institutions. So then you get to 30% ish, maybe 35 of public stocks that are run by passive funds or passive strategies.

Yeah, well it'll be interesting to see if we head to what happens if we move towards 50, 80, 90%.

It's an interesting question. The one thing I'm a sniff test guy, does something feel right, look right, if a company has bad earnings, the stock goes right down. Right. Stocks are moving in. The Fed hiked, so stocks as a whole went down. Some stocks went down more. Those high flying stocks went down more. If passive controlled everything, you wouldn't see these kind of natural moves that are completely correlated to the news and the new data available. So until I see stocks not moving, I'm just not going to worry about it. I think the one thing that passive is going to bring about is slightly more volatility because if you have more people just doing nothing, then that means there's just less people trading, which means the stocks could move a little more. But if you're active, you should embrace that. So I think we'll probably see a little more volume, especially on the smaller mid and small caps and you might have the possibility to hijack a stock like the way the Reddit crowd was able to sort of control GameStop. It's possible that some of the smaller names, because passive owns so much, you could get together and actually really control some of the shares. And that's like I said, these are very, very one off cases. But you won't be able to do that with Apple, but maybe on some small stocks. So we're watching it but again things seem to be moving fine and I think it's overblown and of a worry.

So Eric, if you could give us, before we jump into the wealth universe part of this, if you could give us kind of a few minutes on the story of ETFs why they got created, how they're evolving vis a vis mutual funds, kind of where you see them going. I think that'd be really helpful for our audience.

Sure. I'll do as brief as I can here. Just give you the bare bones, the ETF for those people who don't know much about them. I think the best description I've heard is it's a mutual fund with benefits. It's structured the same. It's the same regulations that govern mutual funds and ETFs. So these are SEC approved, ready for prime time structures. And I believe in the structure. I've dedicated my career to it. It's been through several tests and so it works really well. And the reason it works well and the reason it was many evolutionary steps ahead of it was the design. So I'll take you back to the guy who invented the etf. His name Nate Most. He worked with this guy, Steve Bloom at the American Stock exchange in the 80s. After the crash of 87, there was a lot of people who were scared of futures and derivatives to hedge. A long story short, it was called portfolio insurance and it totally didn't work. Anyway, people were not really feeling futures, but they like to trade things easily. These guys were like, our exchange is in third place. We need to get volume up. And so they had this idea, let's have a mutual fund that trades and we'll physically have the assets stored so there's no chance that you get none of your money back. You'll have the actual assets stored like a mutual fund. So they went through a few iterations of this, but they really created a genuinely good, innovative product. Is when Nate Most worked at the Pacific Commodities Exchange. In a commodities exchange, you would take in a bunch of soybean oil, let's say, and you don't want to trade actual physical soybean oil back and forth. It's a pain. So you go to this warehouse, you put it in the locker, they give you a receipt, and you can trade receipts all day long for the commodity stored in the warehouse. Much easier, right? And if you get a bunch of receipts for soybean oil and you want yours back, you just go to the warehouse and they give you the proportional soybean oil and you're on your way. He applied this to stocks, bonds, everything at this point, although in the case the s and P 500 stocks. And so that's why the first ETF is called SPDR S&P Depository Receipts. So in order to create shares of Spider or Spy, you take in the 500 stocks and the exact weighting. It's Like a recipe. You hand those into State street, they give you 50,000 shares of SPY. Those receipts then trade all over. And if there's a lot of demand for more, somebody's going to go and deliver more of the stocks, get more spy receipts. If people are all selling, you're going to see them trade in the spy receipts for the actual shares back. And so that's called the creation redemption process. And through that process, you're able to manage taxation better because no money is exchanging hands. That's called in kind. So that right there, I won't go into any more detail, but that's the. If you've seen Back to the Future, that's the flux capacitor of the etf. It's what makes ETF so magical and they work so well, is that process. And that employs market makers and authorized participants and sort of like that's what's going on underneath. So the ETF sits there and it trades nicely, attracts the nav. And because you can do that, if the ETF gets anywhere outside of where its NAV is or the underlying value, someone's going to AR that because you could just sell the ETF and buy the underlying or vice versa. And that's why ETFs work so well and they are durable and that's why they're tax efficient. So anyway, that's sort of the story. And when I tell the commodities warehouse, it gives people a visual. It's just not a warehouse, it's called a custodian, but it's the same concept.

Got it. And so versus like a mutual fund where they only transacts once a day, end of day, after, whatever, after the market's closed, they're essentially moving the positions around.

Yeah, the mutual fund is almost even more simple to understand. It's just, hey, I've got this fund, we're going to pool our assets together and I'm going to tell you what the NAV is every day and you're going to buy the fund through me. The issue with the mutual fund and the reason ETFs have taken off, especially in taxable accounts, is that in a mutual fund, if you are a big investor and you want to get out, I have to sell stock or bonds to cash you out. That creates a tax event. That's why every year the people who do nothing but are loyal and stay there get hit with the capital gains distributions and people find that annoying. I think the ETF is fair. The mutual fund is treated unfairly. I feel like it's not like the ETF's attacks loophole. I feel like the mutual fund should be lifted up to that level. I kind of feel bad for mutual funds. They're that, by the way, that tax efficiency of the etf, they didn't design it for the tax. It was a happy accident. But the mutual fund, I think is the way they do it is unfair. So the ETF is really, I would put that tax efficiency is one of the big three advantages of the etf, along with the low fees and the intraday liquidity.

It's great to get this history. I've obviously seen the emergence of these things. When I started my career in financial services, it was all mutual funds and ETFs emerged. I was like, okay, cool, trade intraday. You know, didn't, didn't appreciate how they came to be created. All right, well, let's shift gears to. I want to talk about, you know, one thing you brought up is kind of like the wealth universe. And this is something that's interesting to me and our audience, you know, like, how is wealth, you know, distributed and concentrated in this country and you know, what that means for our society. And then that's going to lead us into a little bit of a discussion around the advisory business and then we'll, we'll dive into your buck. And I know there's a lot of topics, but we can zip through some of this stuff. But I would love to get your take on kind of like how you see the wealth universe and evolving.

Yeah, I mean, I kind of put things into three buckets, which is institutions like asset owners, pensions, endowments, family offices, advisors or wealth managers, and then just regular people with their own money doing it themselves. And I mean, I know you probably, you had that number, you told me in our prep call, of about 100 trillion. And that sounds right to me. I know advisors manage about 26 trillion. Institutions, I would want to say are like 40 and then maybe the leftovers, retail, something like that. But I could be missing a whole chunk or part of the wealth universe. The other part of that question that I could have an intelligent comment on also is when you think of wealth in America, there's obviously a huge wealth gap. A big reason for that is that the wealthy people own the stocks more so than people who aren't wealthy. 50% of Americans don't own any, aren't exposed to any stock or bonds or anything. And so the stock market has, I think, been exacerbated the wealth gap. And the top 1%, I think, own 50% of the stock market. So there is a lot of really rich people in the stock market as well. But I don't know if I've just jumbled things too much there.

No, that's super helpful. It actually, I was. Yeah. We report on the fact that, you know, the number we have is like $108 trillion of total wealth in this country. It's about 75% controlled by the 50 million households that are over 50. So one big slice is just there's a lot of wealth concentration with, with boomers and older and older folks. In fact, I was, when I was research, it's like they have like, nine times the amount of wealth as, like, millennials. It's kind of crazy.

Oh, yeah. I think boomers own 83% or 90% of the stock market. Like, it's some crazy number. Which, by the way, is why when you talk about ETFs, and looking forward, most of the boomers own it through mutual funds, or a lot of them do. That was their vehicle of choice as they pull out and use their money for retirement or pass it on to their kids. You're going to see this huge demographic tailwind moving more money into the ETF structure.

Yeah, 100%. And I do want to talk about that in a second. But, yeah, no, the numbers are pretty surprising. I mean, like, the top 1% owns 30% of all wealth. The top 10% owns 75% of it. So 2 through 9 owns another 40%, and then 10 through 50 owns 30% of the wealth. And then the bottom 50 owns 1 to 2%. It's crazy how little money the bottom half of this country has.

It is. I just spent, obviously two years studying Bogle, and he did wonders for the 50% that hold stocks and bonds. He cleaned that area up big time. But even in his book, he talked about the other 50 and said if we don't address that, there's going to be major problems. You're going to have real issues in America. If we don't figure out some more, we don't close that gap in some way.

Yeah, 100%. So, yeah. So just, you know, since we're on the topic, I'll. I'll reel off some of their stats that I have, which is kind of interesting. Like, 33% of money is held in retirement accounts, 29% is in home equity. So home equity is the other big chunk that I think a lot of people don't talk about. But it's. For many households, it's half the wealth that they have. And Then for a big chunk that don't have, you know, any investments, the stock market, it's probably the vast majority of their money. 10% is in stocks and mutual funds, 9% in other things like banks and insurance, 6% in business, 5% in rental properties, 4% other real estate. Anyway, then vehicles, it gets, you know, gets smaller, hurry. But it's kind of interesting looking at that, at that breakdown. But yeah, let's, let's jump into the advisory business. I would love your take on, you know, we talked about that wealth concentration and that is going to get transferred. One of the things we've talked about is like, you know, I think it's 35 to 40 trillion dollars is going to move from one generation to the next in the next 10, 20 years. And like how does that affect, you know, the, the advisory business?

Yeah, I think a lot of advisors are thinking about this. In fact, the Ritholtz company just had a conference in California called Future Proof that tells you all you need to know. They're getting together to see how can they be prepare themselves so they don't get blindsided in the future by this change or fees or anything. I think it's smart. They really should be looking ahead and creating as much value as possible. So my take on the advisory world is they're kind of where mutual funds were in the 90s. They largely charge 1% or 75 basis points. Right. And they do your portfolio and if you're lucky, some other things. I think that's probably too much for that service. And I think you have betterment really showed that Vanguard and Schwab now have advisory services for the charge of less than 30 basis points and they'll do a lot of those other things. So I think what you're going to find is advisors who don't hustle and give you a lot of value and charge 1% they're going to go out of business. So we have two choices. You either lower your fees and sort of be the sort of low cost service, go to hourly rate or flat fee. I'd call all those like the Bogle esque kind of people. The other way is just to build value as much as possible. So you charge 1%. Well, we do so much for you estate planning. We're a psychologist. You want to, it's a high touch kind of thing. And I think that's fair. And I think the market will sort this out. And if somebody's really wealthy and they feel like their advisor is just really important to their peace of mind. They'll pay the 1%. Or an advisor might be really good at one thing and people are going to go to that advisor for that specialty. Or I heard somebody who's talking about, there's an advisor who's real big with bass fishermen. So if you can find a little niche where you're like the man amongst these certain group of people and they all share word of mouth and you become part of their culture and I think you can also hang on to those higher fees there. So I think you need something else if you're going to charge 1%. Otherwise I think there's going to be a cost pressure just like is happening and has happened in the funds world. It's coming to the advisor world.

Yeah, I agree. I mean at the CEO of Vanguard was saying he wants to, you know, they launched personal advisory service. They wanted to bring that kind of fee pressure that they brought to mutual funds to, to wealth. But we'll see. I mean, if you look at the data, advisors have done a good job of kind of protecting their margin, but they are having to do more. I definitely hear flat fee, you know, fee only planning also that for sure. Not just, it's, it's gone. You know, asset management has gotten commoditized. So you have to do estate planning, you have to do tax planning. And many folks are now getting into tax prep. And then, you know, I mean, I think if, if you look at folks that are like, hey, maybe I have a CPN and paying them a thousand bucks a year, if I can get kind of a total wealth management for three or four thousand bucks or five thousand bucks, is that worth it? It depends how much money you have. But it does feel like though it's going to change pretty significantly. One interesting data point we have is McKinsey says there's roughly $66 billion in annual fees across 42 million households that are good candidates for some kind of virtual financial advisor in the future, some kind of AI powered advisor. And that's the kind of thing we're working on in our platform today. Advice can help lots of people. It just needs to get in the hand. It needs to be democratized.

Yeah, I agree. Also the hourly model makes a lot of sense to me, but this is going to be potentially harder to disrupt. But I don't know because you don't write a check with a percent fee, so you don't feel it. But I think if people wrote a check instead of the percent, I think that would expedite this. But it's probably going to take a long time. And the advisor, unlike a mutual fund, has an actual relationship with the person. That's a big advantage. So there's a couple things that I think will prolong this and the advisor, by the way, I wrote this article talking about how there's this weird thing going on where you know, how advisors drove the move to passive. Once an advisor went from getting a commission from the mutual fund to getting a percent of the client's assets, they immediately went to low cost stuff because now it's coming out of their pocket. So that really the percent of advisors that are fiduciary fee only is completely correlated to the move to passive. And a lot of them are bogleheads. And they went into this business because they like to have good outcomes from the, from the client. But what's interesting is as they really whittle down the fees and the revenue of the asset managers, those guys are going to start launching advice business. And so they're both going to do both. And it's going to, it's like, well, there's, it's almost like there's three people but two chairs. Like it's going to create some kind of a consolidation if you have both companies doing both things. Some of them advisors launch their own ETFs now. And so I think you're going to find a lot of, what's the word.

I'm looking for.

A lot of consolidation. A lot of people hustling their way to create value in different ways. Again, I wrote about this in the book called the Bogle Effect, because if you think about it, Bogle, in my opinion, unleashed all this. He created something that for advisors, they had to leave the system to go use. So I think he actually sparked and fanned the flames of the RIA movement. These brokers were like, I cannot put my clients in these crap funds just because they get a kickback and there's this better way now. And it would gnaw at their consciousness. And they left because you couldn't use Vanguard at these brokerages. So a lot of them had to leave the whole system. That's how ballsy Bogle was. He basically set up something that wouldn't distribute, had no distribution fees in the 70s when everybody was paid that way. And he basically said, you have to come to me if you want this. That's why it took Vanguard so long to take off. But I do think he had a role to play in forcing that RIA movement.

Yeah, it's interesting. It's interesting how eventually the right idea will Win. But it can take a long time. And you hear stories about, you know, these proprietary funds that get created inside these warehouses, and it's like, well, hey, you're invested. But now if you want to leave, like, you. It's going to create this giant tax obligation that we didn't tell you about. So you, you're almost like, forced to stay. You hear. You hear stories about that.

Yeah. But by the way, I would love to get your take on this. Our team talks about this. So right now there's. We'll say there's about, I don't know, 11, 12 trillion in active mutual funds. How much of that money do you think would leave if it could, versus, you know, or it's trapped there because of tax threats.

Yeah, I mean, it's. It can be. I'm sure it's material. I have a friend of mine, he owns a ton of Apple. And, you know, I feel like he's like, okay, good, I'm rich. I've owned it for a long time. But he's like, I can't. Like, he has to be really careful about how he sells it and what he's going to do with it and everything else, because there's so much equity trapped inside that thing. Yeah. So actually, when I was talking with Professor Malkiel yesterday, he was telling the story about, he wrote this book 50 years ago, random walk down Wall street where he looks at all the data and he's like, hey, it looks like if you just buy, you'd be better off buying an index of all the funds, of all the stocks versus buying individual stocks. And when he came out in the industry in Smith Barney, everyone was like, trading individual stocks. They were getting promoted, and they would come up and then come right back down. And then. So these didn't exist. And then he's like, well, Jack Bogle came up with the idea of let's do this. And he was sharing the story about how, okay, they tried to go public. And they're like, we want to raise $250 million. And let me know if I have the numbers wrong. But he's like, we want to raise 250 million bucks. And then the underwriters were like, actually, we can only get half of that. And then they kept on cutting it back, and they ultimately did the first index fund, and it raised like $11 million or something like that to get started.

Yeah, that's exactly right. All that's exactly right. And I love business stories where it's hanging on by a fingernail and you realize it could go the other way. It's good because those kind of stories can give you faith to just keep walking when it's dark out. And I think this is one of those exact stories. This is why I give him. I refer to Bogle as a bit of a punk in the book because I think not paying brokers at that time was just really, really, it was such a brave move because again, and at the time the index Fund was charging 40, 50 basis points. It wasn't 10 yet. But anyway, I think he did have the Wellington funds to sort of like give him some subsidy for that bravery. But still, it was way ahead of its time. And the index, honestly, nothing really took off for Vanguard for quite a while. The first 80 months of the firm's inception, there were outflows from the Wellington fund. So they had nothing going on. There's times where I was studying his life and I was like, I probably would have. And he had small. He had kids. He had kids our age. You know that the kid. The same age our kids are, if they weren't like 40. All right, they were like in their, you know, teens. And, you know, so it's a lot of responsibility. So I'm like, I. I could see just leaving all that and getting a nice cush job, vice president somewhere and just live my little life and not worry about it. But this guy was just a fighter on a mission. Different kind of person.

Yeah. No, it's interesting. It was when you were up at the conference and hearing some of the stories about what he. The decisions he made and just the way he was as a person, like, so one of the big things that I think I appreciate about him is that he mutualized the company and basically gave up probably, definitely a huge amount of personal wealth that he could have created. And maybe it wouldn't got him created if he didn't mutualize, because mutualization was part of aligning himself with the investors and driving to lower fees and the whole thing. But any other stories that jump out from you since you spent a lot of time interviewing him and you know that go to his character.

Yeah, I mean, the. Just talk about the mutual for a minute. Yeah. A mutually owned company. Part of the reason I wrote the book is that nobody had. Nobody's copied that since, you know, Vanguard is like the biggest Mutual. Vanguard has 27% of all US fund assets. That's double any other company in history. Fidelity had the last high water market, 14%. And nobody's copied this firm structure. And I just, I was like, that's crazy. It just deserves study. And I think that's part of what makes Bogle so unique. And I think, you know, those, those early days when he had that, that structure, essentially what you give up. He had money, okay? Let's just say he wasn't like in the, in the woods eating bugs, okay? But when you do a mutual structure, you still get paid, you get a nice salary, but you give up this sort of jackpot, this sort of like Jed, Jeff Bezos level rich, because the owners are now the shareholders. You could never be the owner and you could never be a billionaire. So you give that up, but you make a nice salary. It's just very unusual for someone to go to Wall street who would do that. It just, it's against the type of people who go to Wall Street. They, they want money, they're driven by money. And Vogel, I think, was almost miscast. And so one of the stories I go over in the book was that the whole reason he ended up in this industry was because for his senior thesis, he didn't know what to write about. And he found a magazine, a Fortune magazine lying around in the library at Princeton. And in there was an article on mutual funds. And he was like, oh, this sounds interesting. And it was basically because that industry was just beginning and he wrote about that and that sort of got the job of Wellington and then boom, boom, boom, he's in this industry. But as I said in the presentation, there was the COVID of Time at the same time was Conrad Hilton. And you could think, well, maybe he just picks up a magazine that is Time. And now he's in the hotel business. I don't think this is the classic Wall street kind of guy. And I think there is something about him psychologically also that would, you know, allowed him to do this. And I have a chapter in the book called Explaining Bogle because I try to go into like the 10 things that went into this person, both genetic and environmental, that would create somebody who would, who would do this. Because it doesn't. It's like an anomaly in physics. It doesn't make sense to give up all those personal gains. And that is why I wanted to write the book again. It was like studying something very unusual that you, you never see. But I did find in the book that Bogle loved adulation. And so I think, you know, the St. Jack stuff, it really fit what the hole he was trying to fill inside. We all have holes inside of us, right? He was trying to. He wanted to be liked and appreciated. Rich was. He just was kind of immune to money in that way. And so I think that's part of the psychological makeup that made it possible. But there was also a variety of other things I think that went into it. But that is again, part of the unique story of him is that mutual ownership structure. It's really the essential thing. But even though nobody's copied it, everybody has to copy It now, like BlackRock, Fidelity, they all have to have five basis point index funds and ETFs. They have to. And they probably don't want to. Maybe some do. But so you see why this, why it's called the effect, because it's not just vanguard. What he forced on everybody else is astonishing. He changed the whole industry. Like almost all the money now goes to, goes to the things that he basically invented and forced other people to follow. And so even though nobody's copied that structure, they're largely governed by it.

Right. I think it would be interesting to write a book about and it could be in the finance industry, but. Or, you know, about why people get into these businesses, where they came from. Like what someone was talking with, you know, Burton Malkiel, he's like, hey, I grew up poor in Roxbury in a tenement house. Basically I had no money. I was good at, you know, I was fascinated by stocks and I was good at math and I went to Harvard, got an mba, you know, and then took a, got went to the army briefly and then took basically a job in Wall street because I like, I want to get rich. He works in Wall street. And then he's like. But at the same time he's kind of thinking and he's like, but this is a lot of, there's a lot of noise here and a lot of like, hot air. You know, really there's some bad stuff happening here and it's taking regular people's money. And then he completely shifts gears and devotes his life to like exposing the inefficiencies in the space and you know, versus I'm sure he, you know, could have stayed and printing money the whole way along, but he tries to do this stuff and then he hooks up with Jack Bogle and you know, and it's just interesting how probably like there's probably like a cast of characters that are like, for various reasons got together, put their heads together and kind of said, let's do the right thing here. And then it's taken them, you know, 50 years for it to emerge that this is the right path. It's backed with data and like now everyone's on board with it.

Yeah, no, they, they ended up being right and I, I, I get it. And I think, you know, how people get, get into industries is, is very interesting to me. It's important. If you're doing a character study, you sort of need to find that out. And so Bogles wasn't exactly, it wasn't like he was six years old and said, I'm going to start a mutually owned company. That a lot of this was circumstantial. And there was three points in his career where it was like a one in a thousand thing that happened, that if it didn't happen, you probably don't have Vanguard. And so there was some luck involved. But I think the really great people take luck and opportunity and really capitalize on it. But I, you know, it's funny when you keep mentioned Malkiel, I've just a little story about Bogle that just tells you how hardcore he was. If you go, if you Google Princeton, Common ownership, Malkiel, Bogle, these guys all met, I want to say, five months before Bogle passed away. They're all like 89. They get this group together because there's this worry about common ownership. It was a paper out of Chicago and the media covered it a little bit like index funds are going to ruin capitalism because of common ownership. We know it's bunk, But Bogle, he's 89, right? And Malkiel's 87 or something. They meet in Princeton. They tape this session. It's got Gus Souder who used to run Vanguard, Cliff Asness from aqr, Andrew Lowe of mit. I think I'm missing a co appeal, but there was like 10 of them around this like tape conference room at Princeton. And they're just debating this issue for, I want to say, two and a half hours, watch the whole thing online. And I'm like, man, that, that's a whole other level of dedication to this cause. Because at that age you could, you could totally be like, I'm done. Or you know, you could have been done 10 years ago. And I don't know, I thought, I also think being a little pissed off and passionate about something is, is part of the key to longevity. I think you need something to get your juices flowing, get that blood pumping. And I think for Bogle and Malkiel, this is, this is, you know, one of those things.

Yeah, that was one of the things that was kind of a shock to me when I saw him at the conference who was on video. But I was like, wow, this Guy's sharp as attack and, you know, he's got to be approaching 90 and he's still full of energy and, you know, like, everything's there and. Yeah, I totally agree with you. I think for people that, you know, if they're really good at things, they tend to, they would do it even if you didn't pay them. They'd be like, I don't really, you know, they're not really in it for the money. Money's good, right? And people must be recognized. It is other things. It's like they believe in the cause or. Yeah. They want to be celebrated. Right. The ego, all that stuff. It's. It would be interesting to kind of like analyze folks and understand what drives them.

But I will think that Bogle was necessary for this industry. It was getting. It's just, it's not appropriate for a fund that has like $100 billion to charge 1%. That's a billion dollars a year. That is so much money for that job to society.

It's.

That's why when Vanguard came out and lowered fees as they got bigger, which is called passing on economies of scale, it was arguably just the right thing to do. Whereas some of these funds kept the 1% as they went from 1 billion to 10 billion to 20 billion to 30 billion, the dollar fees are going up and up to astronomical levels. They missed an opportunity. A lot of the industry, I think, should have passed on some of that. They would have been less disrupted as they are today. But I think in this industry, it's different than other industries in that you could actually be. You could be not that great at your job and you could just sort of be lazy, too. And you're going to make more money because as long as the stock market keeps going up, which it does, your 1% will grow, even if you get no new customers. And so I do think this is an industry that probably needs people like that because it's so easy to make way too much money for what you do. It's great. People need to make money. It's important, you know, but there's some, there's some tasks in this industry that it's unbelievable the amount of money for that contribution to society. I mean, it's all legal, but it's just, it's something that's. You need these sort of freedom fighter guys and gals to be out there doing this. And that's one thing I really give credit for. Bogle, he did it using capitalism. I would say Bogle did more to reform Wall street than Bernie Sanders can ever dream of. Bernie's all talk. And even if Bernie got a bill passed that was a way to regulate Wall street from these sort of exorbitant dollar fees, it's possible the other party would get over and undo the rule. What Bogle did was he changed it from inside using capitalism. And now it's pretty permanent. It's just not going to change. And that is an awesome feat. But again, it took them 40 years to do it. It wasn't, it was not overnight.

I know it's, you can make a fortune in financial services, but it does feel like it's a 10, 20 year, you know, effort and. Yeah, totally. I mean, you have to use the market. I'm, you know, I'm a capitalist and, but I'm also, you know, Silicon Valley. Kind of like you have to believe in innovation and hard work and then that is what leads to change and. Yeah, no, I mean, look, in our business, our paying customers manage $15 billion of their own money. Like if we were charged them 1%, we'd make 150 million a year. I mean, it's like I, I'm looking at these numbers because I'm in the space and I'm like. And we would be, you know, a massive, fast growing ria. But you know, instead we make a, you know, so such a small fraction of that because we charge software fees. But you know, I think it's work something like us and flat fee, it's, it's more where the world's going to be because there's so much money at stake innovation. And also I think people will look at this like, like for me the other day I was like looking at my Wells account and I was like, what are these fees? You know, it's like they're charging me fees that I'm not that are seem stupid. It's like, like there's freaking 50, 60 bucks a month in fees here across these dumb accounts that are just like, you know, not necessarily all need to be there. But I'm like, when people start looking at this stuff, they really have to feel like there's value, otherwise they're going to throw up and then these customers are going to walk. And I think that's, you have to be careful about making sure you're delivering that value. Don't piss your customers off and just build for the future, not for the past.

Yeah, absolutely. But you get, and I describe vanguard this way in the book Psychic Income. You have to kind of enjoy that. If you don't, you probably Wouldn't work at Vanguard or do what you do. Psychic Income, I think is what some people in the government, Malky probably would say that because he could probably make more money at like a hedge fund. But Psychic Income is great. It gives you that feeling of purpose and that's, I don't know, hard to put a price tag on that. But again, this is a luxury to talk about it given you do have your baseline expenses covered. If you know somebody doesn't have any money, you gotta hustle and make as much money. But there is a nice. There's income that isn't seen. I think that that is there for people who are going and doing these sort of more low cost ventures. But it's not easy. Like I said, you could easily imagine what if, what could I buy with all the money? The revenue would be so great. I get it.

It's tempting, yeah, 100%. So before I move off the book and kind of move to the close here, any last things you want to call out that like big insights you had from writing your book or things that you think kind of the average retail investor should pay attention to?

Yeah, I mean, I think one of the interesting takeaways from my book is of course Bogle had an impact on the funds business. He had an impact on passive and the advisory business. And he had impact on behavior. I think index funds make it much easier to behave well during drawdowns. One of the things that I wrote about that I think is underappreciated. But something that's happening right now is the more passive takes up the core of a portfolio, the crazier active and ETF launches are going to get. There's this weird barbelling happening now where if you have Vanguard 500 or the total market as your core, you have all the serious stocks covered. You have Apple and Microsoft and even the energy companies and the value stock. It's all there. So what people are doing is they've got 85% in this cheap beta, 60, 40, but then they want to go wild with like 10, 15%. And I call that hot sauce. And because the 64 that the cheap beta is very effective, especially if it compounds. But let's be honest, it's a little boring. So people now are looking for things to decorate. And so part of the Bogle effect, ironically is making active more active. Cathie Wood, she only holds 25 stocks. More ETFs are launching with less and less number of stocks. So they increase the volatility or the hot sauce kick thematic ETFs are part of this. Crypto is part of this. And so that hot sauce Lane is going to be where you're going to see so much stuff thrown at the wall. It would be the opposite of Bogle would find it all detestable, but in a weird way he's responsible for it. And believe it or not, some of that stuff's gonna have a long shelf life. Because if you have, you know, like ARC is a great example, people may hang with ARK more than people think, simply because they're not. She's not the college education fund. She's not your retirement fund. She is curing your fomo just in case this lady's right and we're gonna have robo taxis and robots flying all over. I want to participate. I don't want to have FOMO that I missed out on this crazy future or crypto. Same way, I don't get it. But I don't want to be like 30 years from now, Damn, I should have bought a coin. So there's this Lane right there that I think is going to be really interesting to watch and it is totally a byproduct of the Bogle effect, although one he would not have liked.

Yeah, but probably the most efficient way would be to basically index those things and just spread your bets on the craziness, Right?

Yeah. That's why we sometimes advise, we write to terminal clients and we're like, you kind of have to go where the index isn't because if you can be indexed, you'll be commoditized. And so Cathie Wood, lover or hater, she's unindexable to a degree. I mean there is some correlation with Goldman Sachs non profitable tech basket. But by and large she has 98% active share to the S and P. So it's like she's very different. And so I think over time that Lane will. You'll see some of the legacy active managers who do like closet indexing active reinvent themselves with their best idea funds. Because people think these people don't think these mutual fund companies are dumb or not smart, they're bright people. The problem is they're too close to the index and minus fees, they usually lose to it. And so why not just buy the index? So that middle high cost closet indexing, I think that's going to go away. So I think they'll reinvent themselves as, look, you know, I'm smart. Here's my 30 best stocks. These are stocks I really like that you can put on top of The Vanguard core as a compliment. And I think that's sort of where we're going to see active go. So like, I know, I don't know if that's a, that's one of the more non obvious parts of my book.

I think that's interesting. That's an interesting insight. And I mean we're definitely seeing it out there, right? People are definitely, they're into these much riskier things right now and some of them in with way too much concentration.

But, but I will say if ARK took in Vanguard money and Vanguard took in Ark money, I'd be worried. But ARK is like Vanguard, Ark has 16 billion, right. Vanguard takes that in in like three weeks. Okay. So the, the core of the cheap beta is so much bigger at taking in flows. It just doesn't get much press because it's boring as hell. So proportionally speaking, that hot sauce lane is small. I'm just saying 15% of all the flows in America is pretty good. I mean you could live that, but 85% is still going to this sort of very cheap beta. Or, you know, and I would maybe throw in cheap smart beta in there, but that stuff's all been commoditized and that takes in the big boy money.

What does Vanguard have in total AUM right now.

I want to say it's about 7.5 trillion. It was 8.3. It was 8.3. But the market obviously brought it down this year. But so yeah, BlackRock has about a trillion more, but we've done the study. So BlackRock, a lot of their money comes from global and institutions. Right. But in the US fund business, Vanguard crushes everybody. But Vanguard is actually going to pass blackrock, we think, because each year they nibble away at the difference. And so the percent gap between BlackRock and Vanguard is now 16%. BlackRock has 16% more total assets, but that number was 50% seven, eight years ago. So at this trajectory, Vanguard probably will be the biggest asset manager globally as well as the funds, which they already are. One quick point on this, which is a good note to end on. And this, you saw this in my presentation. Bogle's known for these quotes, right? Like, don't, don't search for a needle in the haystack, just buy the haystack. And other, you know, don't just do something sit there. Here's like 10 of these Ben Franklin quotes that people use. I read a quote, one of his books doing research that I did not know and I was blown away by this. He said in this Book character counts. He said he told the crew one day, that's the employees that I will know that Vanguard's mission is beginning to be complete when our market share begins to erode. He said this in 1991, before they were that big. That is quite a vision because a, that means that he will have forced everyone else to get so good at being low cost and stewards that finally the people would start using them too. And the idea of that is still not happening. So we have this theme with Bogle's dream is not yet fulfilled. Their market share keeps going up and up and up, but at some point it will plateau. But that is, I've asked, I've done this presentation for this book in front of, I don't know, maybe 20 crowds. I've asked everyone, do you have any examples of a CEO rooting for their market share to erode? And I'm yet to have anybody who has a precedent for that. And I think that just really epitomizes why this is so weird. Unusual person.

Well, it's interesting, I think visionary people do. I mean, I will say Elon Musk, who is going through his own kind of crazy period right now. But you know, he did say he had a vision where, look, we're going to build electric cars because that's going to be the way to change the world and get other car manufacturers to follow suit. And I think if you want to make real change, you have to do that. You can't do better, faster, cheaper, which is one way to build companies. You have to do Brave New World, like, I'm just going to come out and like show you how this new way to do things. And then he also built like the whole manufacturing stack, the whole charging stack and everything else. And he's forced the rest of the industry to move along and come along. But I think he did say something like, eventually they're going to copy us and our margins will erode and we're going to suffer. But it can take decades.

That's a fair example. And also Steve Jobs famously said, if you don't cannibalize yourself, somebody else will. And he kept lowering the price on the ipod. I think you're right. And I think Bogle, at the beginning of the book, I say that he was a combination of Steve Jobs and Martin Luther, the Protestant Reformation guy, because he created a religion in a way, with Bogleheads and all that. But the one difference between those two guys at Bogolo is that mutual structure. They're both, at one point, Elon was the richest man on earth. Now, maybe he doesn't care, but that idea of sharing all the profits with the customers, I think that could be really interesting to apply to a space like the electric vehicles. I think that would have really created something even more powerful than he had. But to your point, a innovator comes along, he is going to force the rest of the industry, or she, to comply if they have that big of a vision. I think those guys, you know, come along once a decade. It's that mutually owned thing that makes the Vogel story, just gives it that extra uniqueness, in my opinion, because like I said he would, he'll never ever make that Forbes list.

Right? Yeah, it's, it's tough. You know, you do have to have. I like capitalism for, I mean, part of the, part of capitalism is people can get rich and get obscenely rich. And for a lot of people, they find that highly motivating and they're going to go for it, you know, so you, and you need that, you need people going out there and taking risks because they're, you know, they're, they're betting it all. When people start companies, it's usually not people that have tons of money. It's people that, like Bogle, they've got kids and they could lose it all. And there's, you know, bad things that, you know, there's bad downsides and most companies fail and it's not great. You only hear about the ones that, you know. Survivor's bias. We only hear about the winners, right? They're like, hey, I killed it, I made a billion dollars. Right? You're not about the 10,000 other people that are like, I ruined myself and like burned every last penny I had. It ended even worse.

So, yeah, I mean, you bring up a good point. I was in Australia and I made the same point. There are certain people who do want the money. They want the power, they want the money just to give it away. And you're right, you need that pot of gold there to motivate. And I love that. I love capitalism. But again, the Bogle story is so interesting because he had the motivation without the pot, he already forego the pot and he was just as motivated. That's a weird combo. But like I said, I think I would definitely put him in with other innovators from those businesses that you mentioned.

100%. He's had a massive impact. All right, well, look, Eric, this was great, so I'm just going to close this out. So thanks, Eric, for being on our show and to our audience. Thanks for your time. Definitely check out Eric's book the Bogle Effect and we will post a link on the show notes for this. And if you need help with financial planning, check out newretirement.com or our community and any feedback via reviews is totally welcome and appreciate your time. So thank you.

Thank you very much.