Vanguard CEO Brennan Says 'The Time Is Right' to Step Down

Vanguard's chairman and chief executive officer Jack Brennan decided to relinquish the reins of one of the world's largest mutual fund companies. "It's the right time," he said in an interview Friday.

Vanguard announced on Friday that its board of directors had elected F. William McNabb III as president, effective March 1, and said he would succeed Brennan as CEO within a year. The news came as a surprise because Brennan is just 53 and has offered no hints in previous conversations with Morningstar that he was considering stepping aside. Brennan, who will remain Vanguard's chairman, said it was his idea to give up the fund family's top job, and that he worked with the board to settle on a successor. No personal issues, such as illness, are behind the decision, Brennan maintained. He explained his decision by saying he believes change can invigorate an organization.

"It feels like the right time for change at the top of the house," he said. "It's wonderful to be in my position and to feel as good about this as I do."

Brennan said he "couldn't ask for anybody better" to succeed him than McNabb, who currently runs Vanguard's institutional and international businesses. McNabb has managed nearly every major unit in the company, including its retail mutual fund operations, in his 22 years with Vanguard. McNabb, 50, also has been a member of the senior management team that works closely with Brennan for about 14 years. He was not available for comment, but Brennan said McNabb is "intimately familiar with the entire operation and all aspects of what Vanguard does."

McNabb will inherit a fund family that has gone through a period of tremendous growth and change during Brennan's tenure. Firm founder Jack Bogle handpicked Brennan as his successor and since then Brennan has dealt with bull and bear markets, fund industry scandals and regulatory changes, tremendous asset growth, rapid technological evolution, and the pressures of following a vocal industry legend whose statue remains a centerpiece of Vanguard's Malvern, Pa., campus.

Those pressures came to a head in 1999 when Vanguard's board, then chaired by Brennan, asked a reluctant Bogle to resign from the board when he reached its mandatory retirement age of 70, despite the protests of ardent Bogle fans among Vanguard investors. Bogle ultimately retired but still keeps an office at Vanguard's headquarters and has voiced skepticism about industry trends and innovations, such as exchange-traded funds, that Vanguard under Brennan has embraced.

Although Vanguard has changed and evolved under Brennan in ways its founder may not have envisioned or endorsed, it has remained a bastion of low-cost, long-term, client-focused investing and has prospered because of it. Since Brennan became CEO in 1996 the fund family's assets have grown from nearly $200 billion to $1.3 trillion and its average expense ratio has fallen from 0.32% to 0.20%. The family's fund lineup has grown from 90 to 150 funds and its ranks of employees have swelled from 4,000 in two locations to 12,000 in offices around the globe.

Besides rolling out ETFs (albeit much later than rivals such as Barclays), during Brennan's tenure Vanguard also has launched a competitive lineup of target-date retirement funds, offered 529 college savings plans, provided more advice options to investors, begun courting financial advisors more assiduously, and expanded internationally. More recently Vanguard has stretched its wings into more esoteric areas, introducing a market-neutral fund that is partially managed by its in-house team of quantitative managers and planning managed-payout funds that are designed to act like mini-endowments for individual investors.

The jury is still out on some of these initiatives, such as the market-neutral fund and yet-to-be-launched managed-payout funds. It also may be too early, yet, for a definitive verdict on Brennan's stewardship. Throughout these many changes, though, Brennan has maintained an unwavering commitment to the source of Vanguard's culture and advantages: its mutual ownership structure. There is nothing in McNabb's background to suggest that will change. 

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