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Vanguard Group CEO Mortimer "Tim" Buckley.Vanguard Group/Reuters

When asked how low his company can go when it comes to the management fees investors pay, Vanguard Group's new president and CEO, Tim Buckley, doesn't hesitate with his response of "zero."

"[Low cost] is in our DNA," he says. "It is how we are built. We are built to be asymptotic to zero."

In his first trip outside of the United States as chief executive officer, Mr. Buckley, along with Jim Norris, head of Vanguard's international business, dropped into the Toronto-based headquarters of Vanguard's Canadian operations. In a whirlwind one-day visit last Monday, the same day the S&P 500 plummeted by more than 1,100 points, Mr. Buckley met with employees and a group of industry executives before continuing his global tour of Vanguard offices in Britain, Australia and Hong Kong.

Despite only assuming his new role on Jan. 1, Mr. Buckley is well versed in Vanguard's culture. He first joined the firm in 1991 as an assistant to founder Jack Bogle, where he learned early on the affect high fees can have on overall returns for investors. Now, 27 years later, he finds himself sitting at the head of the boardroom. Mr. Buckley is only the fourth CEO the firm has appointed since opening in 1975, taking over the reins from Bill McNabb who led the firm since 2008 and will remain as chairman of the firm.

Vanguard is the world's second-largest asset manager with more than US$5-trillion in assets under management (AUM). In the United States alone, Vanguard brought in almost US$1-billion in sales every day in 2017.

In Canada, Vanguard is exclusively committed to the exchange-traded-fund business and, since joining the Canadian market in 2012, has grown to more than $14-billion in AUM in 36 funds. The assets may appear to only be a fraction of the size of its U.S. parent, but account for almost 10 per cent of the overall ETF market share in Canada – a unique achievement, as Mr. Norris says no other market has seen such rapid growth in such a short amount of time, including the United States.

The growth of Vanguard has been entirely organic with zero acquisitions to date. Globally, the company typically starts out by focusing on small segments in local markets. As a firm that does not pay trailer fees or commission to those who sell its funds, Vanguard looked at Canada seven different times before finally deciding to compete in the country's ETF industry.

Despite the differences between the markets in which Vanguard operates, Mr. Buckley's message as incoming CEO is consistent: He will continue to focus on the Vanguard promise of providing investors with top performing funds at the lowest price possible.

"Maybe competitors don't realize that we are built to be low cost across the board, but we are," he says. "Being client owned allows us to continue to drive costs lower and lower. We aren't paying outside shareholders or paying some private family. When we do well and have excess revenue, we have a choice. We can either take that excess revenue and reinvest in the business, or we can lower expenses."

In both the U.S and Canadian markets, Vanguard – along with competitor Blackrock Inc., are known for having some of the cheapest investment products on the Street. Together, the fund giants have played a role in driving down the overall cost among its competitors. Since 2011, the average management-expense ratio for an ETF in Canada has dropped to 0.37 per cent from 0.44 per cent, according to research by Morningstar. During that time, Vanguard has slashed its average MER by almost half – down to 0.15 per cent from 0.27 per cent.

So, it may come as a surprise to learn that both Vanguard executives say the company doesn't pay attention to industry averages or what other firms set as a price point when discussing fees.

"The biggest difference for everybody else in this industry that competes with us is pricing is a strategy," Mr. Norris says. "For us, pricing is an outcome. If we grow, we will continue to lower the price. It has nothing to do with strategy."

For investors, the cost of advice will also begin to drop, says Mr. Buckley, who points to technology and automation being the biggest drivers of change in the wealth-management sector. Financial advisers will have to embrace the change or watch it erode their value, he says.

"Technology can now set asset allocations, rebalance portfolios and manage tax-efficient drawdowns. Those advisers who choose to embrace technology can find their costs will drop by 30 [per cent] to 60 per cent for delivering advice and they will be able to focus on activities that clients value more, such as custom solutions and being a great behavioural coach."

Digital advice isn't a novel concept for Mr. Buckley. In the United States, Vanguard runs one of the country's largest robo-adviser platforms with more than US$100-billion in AUM. The platform, Personal Adviser Services, was introduced in 2009 and manages retail accounts for only 0.30 per cent. Last May, Vanguard expanded the robo offering into its British market; and Mr. Buckley has plans to continue making big investments into this area of advice.

When Mr. Buckley and Canada's head of operations Atul Tiwari were asked whether they would launch a similar robo-adviser platform in Canada, the pause in the room was non-committal, but the answer wasn't no.

"When we step into a market like Canada we are here for the long run," Mr. Buckley says. "We love to take things that are successful in Canada and bring them to the U.S, and things that are successful in the U.S, we want to bring them to Canada. If we find there is a better way to invest, then we will bring it across markets. That, you can count on."

Personal Finance columnist Rob Carrick encourages the use of robo-advisers to cut through the complexity of getting started investing in Exchange Traded Funds.

The Globe and Mail

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