Our guest on the podcast today is former Vanguard CEO, Jack Brennan. Jack is the author of a new book, More Straight Talk on Investing, which he cowrote along with John Woerth. He is also author of Straight Talk on Investing, which was published in 2004. Jack served as the CEO of Vanguard from 1996 to 2008 and was chairman of the board from 1998 to 2009. He is now chairman emeritus and senior advisor at Vanguard. He also serves as the chairman of the board of trustees at Notre Dame University and has served on numerous corporate boards, including General Electric and American Express. He received his undergraduate degree at Dartmouth College and his MBA at Harvard Business School.
"Opinion: Former Vanguard CEO: 5 Hurdles Facing Investors Now and How to Overcome Them," by Jack Brennan, marketwatch.com, May 1, 2021.
"Straight Talk," by Jack Brennan, humbledollar.com, April 27, 2021.
"Vanguard's Jack Brennan: The Best Way to Build Wealth," Nasdaq.com, May 24, 2021.
"The Former CEO of Vanguard Has Some Surprising Views on Alternatives," by Julie Segal, institutionalinvestor.com, April 30, 2021.
Asset Allocation and Investing
"Run Your Race: Money Wisdom From Vanguard's Jack Brennan," by Chris Taylor, money.usnews.com, May 19, 2021.
"5 Investing Principles That Are Built to Last," by Jack Brennan, investornews.vanguard.com, April 12, 2021.
Christine Benz: Hi, and welcome to The Long View. I'm Christine Benz, director of personal finance for Morningstar.
Jeff Ptak: And I'm Jeff Ptak, chief ratings officer for Morningstar Research Services.
Benz: Our guest on the podcast today is former Vanguard CEO, Jack Brennan. Jack is the author of a new book, More Straight Talk on Investing, which he cowrote along with John Woerth. He is also author of Straight Talk on Investing, which was published in 2004. Jack served as the CEO of Vanguard from 1996 to 2008 and was chairman of the board from 1998 to 2009. He is now chairman emeritus and senior advisor at Vanguard. He also serves as the chairman of the board of trustees at Notre Dame University and has served on numerous corporate boards, including General Electric and American Express. He received his undergraduate degree at Dartmouth College and his MBA at Harvard Business School. Jack, welcome to The Long View.
Jack Brennan: Thank you very much. It's a pleasure to be with you today.
Benz: Well, we're thrilled to have you here and congratulations on your new book. I want to talk about in what ways the landscape has gotten better for investors since the publication of Straight Talk on Investing in 2002? And in what ways would you say it's gotten worse?
Brennan: I think in aggregate, it's getting not just better, but far better. And I'll give you just a few reasons why I think that's true. If you looked at the cost of investing, it's down dramatically in this century. And cost is the only controllable component in an investment program. So, I think that alone would make this a period of time where it's gotten better for investors. I think there's a couple of product sets that have become mainstream that are really important. I think ETFs are one--low cost, tax-efficient, give you the kind of exposures you want, whether it's total market or specific sector; they're very liquid now, they weren't so much back then. And I think they're one of the great innovations, frankly, of the last half century. There haven't been all that many meaningful innovations. So that's a second plus.
Third, for me--I'll get to the downsides in a second--but a third is the availability of various advice platforms, and at various price points, dramatically different. The Fidelitys, Vanguards, Schwabs have programs that are very cost-efficient, from trusted advisors. There are robos and they are all the way up to wealth management. But the availability, quality, and cost of advice makes me very optimistic about the investing environment for people. And maybe I think the downsides, really all wrapped into one, which is just too much noise.
The availability of information on social media, frankly, mainstream media loving following fad. I think it's potentially dangerous. I don't think in the aggregate, it's all that harmful. But I think the temptation for investors to hear too much and be prompted to do too much is greater today than it was. We went through the ‘80s and ‘90s, where education in mainstream media and through places like Morningstar was fabulous. It's changed in 20 years. I think we're at the too-much-of-a-good-thing-is-a-bad-thing stage now. And you have to learn, and you'll learn the hard way, probably today that there's too much information, so don't react to it. But the balance sheet is very much positive, in my view over the subsequent 18 or 19 years here, Christine.
Ptak: What are the key areas where your views have changed or evolved since the publication of the original Straight Talk on Investing?
Brennan: Again, I'll give you a couple. I've had a chance to spend a lot of time in the endowment world for a variety of places. And I've learned a lot there, actually, I've become more knowledgeable about privates. And I now think of equity exposure for down the road--certainly all investors, retail, and institutional closet indexing--which I'm not very enamored with. Real active equity, indexing, and then private is a mainstream part of the business, but I'm not sure I appreciate it. And maybe it wasn't 18 years ago. I think that's a major change in my mindset and done well, can be complementary to a more traditional ways of managing money. Probably as I've aged myself and watched my contemporaries and I think about how do you manage yourself in retirement? Two aspects of that I think are important: one is the need for advice at that stage. We can talk more about that.
And then the second one is environmental but it's secular at this stage. It seems cyclical at one time, it's now secular, and that's fundamentally low rates and what's the role of fixed income? What is truly a balanced portfolio today? Those would be a few of the things. One of the great parts about investing--you guys know it is--you should always be learning if you want to be successful and helpful. And those are ones that when I started to write More Straight Talk on Investing, I went back and read Straight Talk on Investing and said, I was thrilled that the core principles really have shown themselves to be even more important during a challenging century. But then these other things are ones that I look at and I think, I have a little more wisdom than I had then and obviously more experience.
Benz: Given the changes to the landscape, and the way your thinking has evolved, what do you think your key strategic priorities would be if you were leading an investment management organization today?
Brennan: Well, they'd be the same as when I was leading Vanguard. First and foremost, it always has to define outcomes. And there are a lot of things that go into that: cost, performance, type of products you offer. But if you're an investment management firm, and you're not driven by client outcomes, you might be successful for a cycle, but you're not going to be successful in the long haul. So that's the dominant theme that the great firms in our business, leaders look toward. I think you have to be focused on value today, and how does my value proposition stack up. You may be an above-average firm that performs really well, because you're really strong in a certain active niche, that's fine. But to produce market returns at market risk, at a high price is something that's just not going to be a sustainable business proposition. So, testing yourself on value, and how do we think about your ability as a firm to deliver value, I think is critical.
Last thing, I'd say, because it does matter, it's a human capital business. It's kind of a simple, two-part question that highly effective leaders ask in any business, but I think particularly in a business like this, is what are we most passionate about? And where do we think we can be the best in the world? And I don't think you need to hire a big consulting firm to help you think through strategy. If you go through just those three or four things. You need a lot of humility to say I may be where I have been, is it where I should be as a firm in the future? But that's how I think about our business, the levers that you pull to create a sustainable, growing and successful organization.
Ptak: Shifting gears to the current environment, the past year's seen a near mania for small individual investors, investing in individual stocks, cryptocurrencies, NFTs. What's driving that risk-seeking activity, in your view?
Brennan: I'd say two things. And it's happened for decades, if not centuries. One is momentum. We're in a 12-year bull market with a couple of hiccups, but 12-year bull market. So, it looks easy to make money in many different asset classes, certainly equities, but other crypto is a momentum thing, NFT looks like a momentum thing. And so, I think momentum is the primary thing driving it. And, the momentum shifts from here to there, ends badly when it stops, as it has in many different sectors. So, I think that's a critical part of it. I also think social media, obviously, there are different ways for people to hear and learn, theoretically learn, about things and you just watch the headlines, whether it's crypto or whether it's GameStop, or whether it's AMC--pick whatever you want--becomes a frenzied environment, and it's the term gamification, all of that. I think it's a passing dance, and personally I don't think this is a substantive trend that's going to matter.
It gets a lot of headlines, because if you're traditional media, you get two headlines out of it: the run up and then the collapse. So, it's two stories, not just one. But momentum markets, create momentum markets until they stop, and they stop badly as we've seen again through history, whether it's tulips or crypto or gold in the ‘80s--you can go down your list. So that's what I look at it and I look at it with curiosity, but not anything that I think is substantively meaningful, frankly, to markets.
Benz: You devoted a section of the book to speculative bubbles. Are we in bubble territory with any of these asset types in your opinion? It sounds like you think we are. Which do you feel are most at risk of being in the bubble zone?
Brennan: The important one is equities—it's the dominant asset class for your listeners, your readers. I don't happen to think we're in a bubble stage there. We're certainly not in the devalue stage. You've got a concentrated large-cap market. Top 10 stocks are like 30% of the market cap, the S&P, that's concentrated. You've got low yields; you've got full valuation. So, to get good returns going forward, you're going to have to get exceptional growth and/or multiple expansion. So, I think that's a challenge in the equity market. Christine, frankly I don't spend a lot of time thinking about fringe markets, whether it's gold or crypto or something else, they're trading markets. I don't consider them investing markets. I think of them as trading entities and vehicles and commodities is the same way. There are firms that make great livings trading these things, but I think it's a dangerous game--bubble stage or not--for most individuals and financial advisors maybe spend much time thinking about them.
Ptak: You sit on the board of American Express Corporation that gives you a bird's-eye view on consumer spending patterns. Are you seeing signs that consumers are throwing caution to the wind and splurging in perhaps unhealthy ways or does the frenzy in things like meme stocks and SPACs seem somewhat compartmentalized?
Brennan: I'd say very compartmentalized, Jeff. If you look at the industry data and credit cards all through actually from a year ago to today, the credit performance has been far better than anyone would have expected. And unemployment continues to come down, and so on. And so, I don't think the traditional consumer is frenzied at all. Obviously, you see lots of headlines about real estate in certain parts of the country and so on. That may be frenzy, but that's not consumption. That at least is investing; it may not be particularly good investment. I think what you see with meme stocks and SPACs and stuff is over here. But the core of the economy is people actually handle themselves pretty prudently. And you look at savings rates and they are through the roof. So, you say, well, maybe we'll go on a binge after that. My personal view is, obviously we all learned a ton in the last year and a half. But in terms of substantive impact on investing markets around the economy, I don't happen to think the pandemic is going to be seen as something that we look back 10 years, that's nearly as meaningful as the global financial crisis.
Benz: Switching over to discuss investing, which is the focus of your book. Morningstar data suggests that target-date funds have been a home run from the standpoint of investor outcomes, which you referenced earlier. I would guess that Vanguard data tells a similar tale, which is that investors buy them and sit tight. And we've also seen the lion's share of fund flows going to the very low-cost target-date series. Do target-date funds effectively solve the challenge of how to invest in the years leading up to retirement? Or are there some retirement-savers, for whom they're not a good fit?
Brennan: I don't think there's anyone for whom they're not a good fit. In the macro sense, Christine, along with ETFs, they're one of the few really great innovations for retail investors in the last half a century really. And so I think they are a great option. Are they the optimal option? Probably not at either end of the spectrum--either they're more sophisticated or higher wealth, or at the less sophisticated or very risk-averse. But if you think about a bell curve, that middle of the bell curve is incredibly well served by these. Because in your young years, it probably gives you more equity exposure than you might have thought you wanted. The rebalancing that occurs is just tremendous discipline for people.
So, I think they really serve the bulk of particularly 401(k), 457 investors incredibly well. I think if somebody has a very high savings rate, it may not work for them. Because high savings rate in my view gives you the ability to take more risk, and you may want to have greater equity exposure than that traditional TDF would tell you to have. And that's the place where I see somebody wants to be doing something different. But, frankly, your company only offered target-date funds in their 401(k) plan. I think they're incredibly well served as a broad-based employee population. Obviously, I’m a fan. I think it's just a tremendous innovation. And it's the inherent discipline. And I think it is the education that goes around it that says, in a sense, don't even look at this for 30 years; we'll take care of it for you and it's not a naive promise. It's a promise to manage your portfolio at a cost that's incredibly low generally. And for most people, they are savers, not actually investors, when you think about it. Your readers and listeners are much more engaged, but most of the population is saving every two weeks from their paycheck. And what a great gift to have somebody manage it with no fee on top.
Ptak: In the book, you cautioned investors against using past returns in their forecasts, noting that it's better to err on the side of conservative return assumptions. What sorts of return expectations for stocks and bonds are reasonable to use for the next decade? And what about the next 30 years?
Brennan: Actually, I'm glad you asked about 30 years, because, we all have, even me I hope, has the 30-year time horizon at my age. So, 10 years is a long time, but most of us should be thinking in those kinds of time frames. If you go back and look at historic data, it's fun to do. And you say, what kind of returns have equities produced and have bonds produced over time. And I think the prospects are very different for stocks and bonds, frankly. That I think in real-world terms, Jeff, very hard to see real returns on bonds being attractive over the next 10 years. Period. That's a forecast, I'm not all that big on forecasting, but from these going in yields, and these inflation rates, I think it's a real challenge.
You go out 30, you'll get paid something, particularly if you reinvest. Rising rates are not a bad thing, if the long-term bond holder and a mutual fund for you to reinvest. So, I can see getting a 1% or 2% real return on bonds over 30 years. I think it's less optimistic over 10. Equities, my guess is you'd expect to see something less than what we've seen, traditionally, 6% or 7% real returns on equities over the next decade. But I see no reason that you shouldn't expect to get normal historic returns going out further, if you believe in innovations that will come about in the economy. If you believe in globalization of economics and trade. If you believe in efficiencies and productivity.
If you look over 200 years’ stock, they’re giving you 6.5% real returns. And if you look over 100, it's 7.5%, and if you look over 50 its 6.5%. So, my own sense is, that's what you should expect. And I would plan for less, as you alluded to. I think you always want to be surprised on the upside when you're doing financial planning. So anyway, that's the way I look at those two asset classes. I think it's a really challenging period of time for fixed income after what is now a 40-year bull market in months.
Benz: We've noticed that fund flows seem to have taken kind of a contrarian turn in recent years. For example, investors have been adding to bonds and international equities rather than U.S. stocks, even though U.S. stocks have outperformed by a lot. What's driving that in your view? And is there any chance that it will persist going forward?
Brennan: One of the data points that I don't have in my hand is some of what you see in fund flows is rebalancing in TDFs. And so, there's a natural, contrarian nature to target-date funds, the rebalancing to the underperforming asset class. So, I think that's probably part of it. And secondly, I think there is the financial advisory community is one of the great things that financial advisors brings to their clients is discipline around rebalancing, which, when you do it yourself, you have to force yourself to do it, if you have professional helping you. And I see the data, Christine, and I'm really happy. I'm happy to see it, because to me, it smacks of discipline. And instead of following the momentum that happens in the SPACs and meme stocks, they're saying, I want to be 60-30-10, and I'm going to rebalance to that, even though the U.S. stock market is running inherent in that data is, especially because the U.S. stock market is running. And I want to get back to where I want to be. I think it's a really good sign, because you go back a long time ago, when funds first became prominent in the '80s, the flows all went to the hot sector. And so, I'm encouraged by the data.
Ptak: Some investors would argue that investors could reasonably own a total U.S. index fund, a total international stock fund, and a total bond fund and call it a day. I suspect you agree, but the question is, would a few additional assets be worthwhile? What would be at the top of your list in terms of additional assets that one might own for diversification purposes? I suppose, private investments--that's something you mentioned earlier in the conversation-- perhaps that comes to mind, but what would be on your list?
Brennan: So, really, I'd give you three things that I think could be very complementary. One is highly concentrated, call it ownership-mindset equities. As a complement to that core portfolio. I didn't answer your question. I do agree that that's a very viable investment strategy to have those three products in hand at the mix you want. I'm a fan of active management. And I'm a fan of highly researched, low turnover, investor mindset, active management. So, to me, that's one of the things that I think investors should look at, because it will be different than: take the risk in search of higher reward. But it will be different than the core equities that you get in the total stock market fund. So that's category one.
Second, it's coming, and it's coming at a reasonably rapid clip, I think, looking at a couple of sets of diversifiers. There are products in the institutional world that diversify through baskets of hedge funds, well-managed, well-overseen that will come. I actually talked about it in this book a little bit. And then private equity and exposure to private equity. But with the big caveat, only seek it from a trusted provider who can show you that they in turn will be disciplined in the process of how they're going to invest. It's a space where if you look by number of funds, at least the academic data I've seen is the average private equity fund has underperformed a total stock market portfolio. The ones that have done well have done spectacularly well.
So, you have to be confident that you're investing in a great pool. The third area, I would say is some real estate exposure beyond your home, because its income producing the best real estate investment trusts are very well-run businesses, they're diversified, they grow their income streams. And it's probably a more viable place to get income today than fixed income, where rising rates will be a tough place to make total return money. So those are three areas that I think about and I think are available and will be increasingly available to people and your listeners.
Benz: Wanted to ask about direct indexing. This idea of investors assembling customized baskets of stocks based on their needs and preferences. It's been getting a lot of buzz over the past few years. Do you think that idea holds promise?
Brennan: I think it holds promise, but like many things promise with a risk. Particularly in a world where ESG has become more important. That's one of the appeals of direct indexing, frankly. But the risk is to me, twofold. One, understanding the total actual costs of it--the cost of reinvesting, the transaction costs involved. And so it's pretty simple to know what a Vanguard ETF costs or Vanguard index fund, it's in the prospectus and report. There are costs involved in investing directly in markets that are different. And I think people need to know that. And if they choose to go the direct indexing route, because they want to be selective, just do it eyes open.
The second part is the risk that it becomes an active strategy. That I'm bearish on energy so I'm going to take the energy stocks out of the S&P 500. That's a choice you can make. But that's an active choice you're making. And so, I think the education around direct indexing is going to be a very important part of whether or not it becomes a successful and very viable option in the investing marketplace. But it has appeal, I suspect it'll grow. But those would be my two caveats for people, before they jump in and think it's merely buying 422 stocks of a 500-stock index. It's more complicated than that.
Ptak: What about ESG? You mentioned that a moment ago, how would you counsel investors to approach incorporating ESG criteria into their portfolios, if at all? It's not something I think that you expanded on too much in the book. So we'd be interested if you can elaborate on that topic here.
Brennan: I think ESG as more than a theme is really in some ways, the first time in my long career, I think it's got legs and is going to be an important part of the investing landscape as we look out. I think climate is the catalyst for that in many ways and has been over the last five or six years. And I think if I were counseling, and people do ask, and I say well look at several options for you to invest. I'd rather they to do it in in a package form of mutual fund is a good way to do it. But study five or six or seven of them and find out which one might marry up best with your values or the issues you're concerned about. I do think if you're going to invest in a package product, it gets hard to match every single thing you want. And that's one of the challenges with ESG. But I think getting educated before you buy is even more important than the space, then in most of investing, because there's other things beyond returns that matter to you and you want to make sure what you're investing in, aligns with that.
The other thing I counsel people to do is, if you're investing in a fund or through some other commingled vehicle, test the experience of the provider. It's become a hot space, like everything, suddenly lots of firms are ESG firms. There are some outfits that have done it for a long time and done it successfully. And so, I think trying to find a partner, if you will, who you identify with their definition of ESG. And they've proven that they can do it successfully over time is the key to success here.
Benz: For a while, it seemed like the fund industry had kicked some of its bad habits like launching trendy products at inopportune times. But we've seen a wave of new thematic funds in recent years and lots of assets have flowed to at least some of them. Do you think this is just a function of where we are in the cycle? And that a lot of this excess will get wrung out in the next bear market? Or should we have more of an open mind to these types of really narrow strategies?
Brennan: I think a lot of it will be wrung out in the next bear market. But I also think we should always have an open mind, Christine. And particularly in advised accounts or financial advisors, there are certain narrow strategies that for specific family needs and challenges can meet a purpose. They're just some bad ideas, and you don't need an open mind there. But I think having an open mind to other products, again, well run at a good price is a core to being successful in the long term. You know well most of them won't survive the bear market. The ones that have an enduring purpose and functionality in investment portfolios--and it'll be a small percentage--but you may not know ahead of time and needs may change, and they may be very specific needs.
So, I'm always interested and I try to get knowledgeable on new products, dismiss most of them. But once in a while, even REITs--you think about, there was no market cap in REITs 25 years ago, and lot of private companies became REITs that became a very viable asset class. Many of us, I put myself in that camp, were suspicious that the REIT was just bailing out bad practices in the real estate industry and it's turned into a very viable niche, if you will. So, there'll be others like that. But if I were traditional retail investor, I wouldn't spend a lot of time listening to Clarion talk about recent term performance.
Ptak: You served at the Board of Trustees at the University of Notre Dame, during your tenure there, the University's endowment fund has enjoyed standout investment performance. What lessons has that experience imparted that you think would be useful to everyday investors? And what would be the wrong lessons for everyday investors to draw from the endowment fund success?
Brennan: That's a great way of putting the question actually. There are lot of good good lessons. But let me start with the most important one, at least the way I view it. Notre Dame has done a tremendous job. The leader retired after 31 years, a year ago, and he was succeeded by somebody who's been with the University for 27 years. And we hope we can see that kind of succession for generations, much as David Swensen passed away at Yale—and same kind of thing at Yale. Yale and Notre Dame are the role models, in my view, for thinking long term. And thinking about how diversification can be of great value for you. And so, that's the overriding lesson, and you find people to implement the strategies who are deeply passionate about the mission. That sounds a little high mighty, but I believe it to be very true. Endowments and foundations that have done best, over meaningful periods of time, have consistency of leadership and mission-driven people in the investment offices, and it's tremendous to watch.
There are a few other things that I think you'd learn--privates is one of them, and I've had a chance to, obviously be involved with Notre Dame and a couple of other endowments and you see the value of privates well done. You see the value in diversifiers--various kinds of long-only products or long-short products done well. Not where I spent my career. The other two softer elements are criticality of finding and selecting great investment partners as an endowment. It's the same thing for any of us as individuals find the firm or two or three firms that you trust to always have your best interests at heart. And then patience, and believing in your strategy, are the great lessons.
I have a chapter in the book called, “Is the ‘Smart Money’ Smart?” Yes, but…, and it's about endowments more broadly. And one of the watch-outs is they have an advantage, because they have been in this space for a long time. And they, in many ways, get access to firms that just generally aren't available to most of us as individuals or even other institutions. So, don't think you can replicate the private equity performance at the best endowments, the venture performance at the best endowments. I think that's the humility test that all of us have to have as individuals. It's really important.
And then the other thing you read about the liquidity premium that you get by buying private equity or public--the data would say it's true. But any individual has to step back and say, “Can I withstand a period of time where I can't access my money?” In 2008-09, there were several fabulous universities that had cash crunches, because they didn't have cash because they were overextended in the private marketplaces. So those are the two big watch-outs for me. Don't expect to replicate the access that the best of these enterprises have, because you won't be able to and then don't get too swept up in the idea that there's a guaranteed illiquidity premium; there may not be. There's a Warren Buffett quote, which is “The market can stay irrational longer than you can stay liquid.” And you need to test yourself against that.
Benz: Wanted to discuss financial advice, which you referenced at the top of the conversation. Fund costs have come way down over the past few decades, but advisor fees haven't changed a lot--that sort of 1% AUM fee is still very much the norm. Is that the next frontier lowering the cost of advice for investors? And if so, what do you think will be the main catalysts for driving down advisor fees?
Brennan: Well, you see a whole another segment of the market, it's been created through places like Vanguard, Fidelity, Charles Schwab, and few others that, had in many ways been traditional, do-it-yourself places and now offer a large and robust financial-advice programs at 25 to 30 basis points. So, I think that competition, and it's still early days, in a sense, but if those kinds of programs--I don't mean to highlight those three, but they're obviously very big, very prominent. If that turns out to be highly successful--inherently, there'll be price pressure. It's much as index funds and Vanguard itself created price pressure in the mutual fund business. So, my own view is it's inevitable.
But the good news about it is that it also forces the whole advisory business to say “Where's my value-add here?” And the advisor business wasn't called the financial, it was called the brokerage business—another era, because they were stock jockeys. Now there's a much more robust advice component to it. So I think, you should expect to see erosion in some parts of the business from a price standpoint, because there's another very viable option that really wasn't there 20 years ago, and now it is, I don't have to think pure robos are going to be that meaningful, frankly. But when big, trusted firms come in at price point that's a third, it's not the full service that you get at a wire house. But if the net net is different, they'll be pressure, and there already is pressure--you see it to various aspects of pricing in the financial advice business, but I think it's inevitable and it'll be another good thing for investors.
Ptak: In the book, you state that people who are accumulating assets for retirement can probably do without an advisor, but you unreservedly recommend hiring an advisor to help with the deaccumulation process in retirement. Can you explain what the key reasons are behind that?
Brennan: I said earlier that most of us are savers through the accumulation period, because for those who are fortunate to have one, the retirement plan is a dominant form of their retirement security accumulation. And it's in a TDF or something, whatever happens, it happens every two weeks, you're not really making all that many investment decisions along the way. And you have time as an ally, and you have earning powers now. So that's a risk reduction or allows you to take more risk. You get to retirement and you have different objectives--with your life, moving out--it becomes a much more serious game around investing. And, by the way, what I say in the book is, you have to make a conscious decision not to have advice, it's slightly different than the way you framed it, you may choose to do it and that's fine. But you should make a conscious decision, not an autopilot decision, not to seek advice.
And the primary reason for that, for me is downside. The downside risk of mistakes, either not taking enough risk or taking too much risk are greater in retirement. As they say, time isn't your ally, you don't have the earning power to offset it. And then, frankly, back to the earlier conversation, the options for getting a one-time plan or a light-touch plan or something else, are so much greater today than they've ever been. Strikes me that I tell people you should think about what you pay a financial advisor as an insurance premium. And it actually hits home with people. You always hate paying your insurance premium unless you have a claim. And this is a way of thinking and saying, “I want to minimize my downside risk by having a professional with me, side by side.” And that's why I say it.
And I've seen it in action. It's interesting, lots of my contemporaries who have been do-it-yourselfers for 40 years, and then they come and say, “What do I do, kiddo?” And I introduce them to financial advisors or somebody and they seem very comforted and feel that it was the right decision because they sleep better at night.
Benz: We talked earlier about target-date funds, which you think have been a great innovation, but it seems as though there's room for more innovation in the retirement income product space. Could there be better retirement income products, in your view? Or is the retirement income problem so complicated that it just can't be productized well?
Brennan: No, nothing's too complicated, if there's the will. And I say time, and I don't mean decades, with years, that there'll be better solutions. The advent of defined-contribution plans in my admittedly interested view, but the mass says being in a defined-contribution plan is better than being in a defined-benefit plan. If you do it, you have an asset; if returns are decent, you accumulate more; and your draw can be more than a pension. But people do value guaranteed income above Social Security. So I would hope we can, as a business come up with understandable fairly priced, deaccumulation products, income products that probably use artificial intelligence, maybe products of one, but you hope that there could be collective parts of it to lower the cost.
And I think it's the next great frontier, frankly, it's the mirror of TDS, Christine. And I'm sure they'll come. Because most annuities are just too expensive. And so you want to find something and particularly in yield environments like this, that probably are index based, highly efficient, very technology based but allows you to make your mix of, call it guaranteed and total return-based income, over the last 30 or 40 years of your life easier to come by than it is today.
Ptak: How would you recommend that new retirees make retirement work in this era of very low yields and arguably lofty valuations?
Brennan: It's in a sense question of the decades really with all the baby boomers retiring. First and to me, the best thing you can do is get your spending in line at a level that is comfortable for you. And, again, think about 4% I say, plan for two, for a couple of reasons. And two was harsh, so maybe it's three. But I think understanding what you think of realistic draw off your assets combined with other sources, whether it's a pension or Social Security, or both. Set that draw as low as you can. And I think it's even more important today in a low-yield environment, because one of the things that's very hard, you get nothing on cash. You take a lot of risk if you go out in maturity. And, last chapter I wrote after the book was about to be published, and it's called "Where Did My Income Go." And I recommend pretty aggressively to people take a look at high-quality basket of stocks, which will give you a yield that looks like maybe even higher than a 10-year Treasury bond, gives you a call on growth, and then close your eyes to the volatility.
If you can do that, I think it's great way to set yourself up and then have some fixed income as ballasts. But the question is, how much diversification value you are going to get from these yields out of fixed income. But spending is the key and spending relative to your asset base to me is job 1, 2, 3, and 4, and then you make decisions from that. And, to me, that's the thing. If you're 52, you should be thinking about setting yourself up for whatever year you think you're going to retire and be in a financial entrepreneur mode living off your assets.
Benz: When we look at the data, it appears that a healthy share of workers are well situated on the retirement savings rate, while other workers are dramatically undersaved and have quite literally nothing saved. Do you have thoughts on how our retirement system might better serve all workers, including lower-income ones, recognizing that you're not a policy specialist? But I'm just curious to get your thoughts there.
Brennan: I've actually served in a couple of task forces looking at this over the years. I don't know if you're familiar with the Australia's mandatory super, it's a great program. They're almost over saved when they get to retirement. But to me, I hope we can come up with a national will to implement something along the lines of mandatory, you know, we have mandatory Social Security contributions. Ideally, could you take two points of that and put it into investment accounts, that's a huge governmental challenge. But even if you said there'll be a mandatory deduction into the federal Thrift plan or something like that, not accessible, until you hit retirement. And maybe a match. I think a match would be a great use of governmental dollars up to some income level. And not a high number, but for the people who don't work at a company with a rich 401(k) plan.
So, I would like to see us get to a point where we're willing to say, this matters, mandatory matters, which is never particularly important, although we do it in other spheres. And we affect people--you save $1,000, we give you $500. I was fooling around with some numbers the other day--if we put $1,000 in for 40 years, 6% real return, you end up with $150,000, today's dollars. If you pick a number, drop 3% off that, it’s $4,500 and I was working off somebody making $30,000 today. It's 20% of what you earn today, 50 maybe of what you earn today. So, you'd have a 15% increment on your Social Security payment and pretty painless. You guys know: save once and then…
So anyway, long winded but it doesn't seem to have a priority today, but I hope it does because it is a crisis of equity. And this is one way of closing that equity gap for people in underserved communities, people in hourly jobs where it's expensive for the employer to run a plan. So yes, I do have thoughts on it. I guess just the bottom line and I really hope somewhere in the next few years, it resurfaces as a major issue, addressing multiple different priorities that are in the political discussion today.
Ptak: In closing, I wanted to ask you about those who've mentored you. You've had tough bosses who demanded excellence of you, one of them being Jack Bogle. Clearly that paid off as you've had a very successful career, but not everyone responds well to the kind of tutelage you had. Is there a place for "tough love" and how did you strike that balance in the way you manage the teams you were responsible for?
Brennan: Not to be argumentative, I don't see tough love as actually anything that is a meaningful concept in leadership, frankly. Nobody wants to work for and will follow a tough guy, if you will. I think of it as something very different, maybe with the same outcomes. But we have a leadership book at Vanguard, and one of the chapter titles is, "Set High Expectations." We hope that emerging and experienced leaders will do. And setting high expectations, with a shared commitment to excellence, it's very motivational to people. It's very motivational to people. And, the best leaders I've worked with, worked for, seen, have that very clearly defined set of high expectations for their teams. And then very importantly, it's all around driving to excellence at the end of the day. People sign on to that they want to work for an organization and with people who are driven to be as impactful and particularly in a mission-driven organization. So, I wouldn't have it any other way. I'm guessing if you put 20 people who worked with me on the phone, they'd say, yeah, we had high expectations. And I think it's the only way you create value for your constituents in an enterprise that's enduring is to be driven every day to be better than you were yesterday.
Benz: Well, Jack, this has been such a wonderful conversation. Thank you so much for taking time out of your schedule to join us today.
Brennan: It's a pleasure and keep up the great work. You guys are one of the voices of sanity when there's too much craziness going on in the markets and you are a trusted partner for your subscribers and for others. And it's a great thing to have in a marketplace where there's too much noise that's not of any value.
Benz: Thanks so much for that.
Ptak: Thanks again.
Benz: Thanks for joining us on The Long View. If you liked what you heard, please subscribe to and rate The Long View from Morningstar on iTunes, Google Play, Spotify, or wherever you get your podcasts.
You can follow us on Twitter @Christine_Benz.
Ptak: And @Syouth1, which is, S-Y-O-U-T-H and the number 1.
Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.
Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.
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