Speaking at a luncheon session to the 1,300 attendees of the Morningstar Investment Conference on Thursday, June 24, in Chicago, Vanguard CEO Bill McNabb laid out the three main building blocks for restoring both investor and advisor trust in the markets, and presented the Vanguard line on the pending financial services reform package.
“Trust levels,” McNabb said, “are at all time lows,” pointing out that “It’s not just individual and institutional investors, but advisors” as well whose trust has been shaken.
He said those three building blocks of trust, the “essential ingredient” in the investing and advice business, are:
? Simplicity, which he said is exemplified by the “Five-minute rule” first coined by Richard Ennis of the pension consulting firm Ennis, Knupp: “If you don’t understand the thesis underlying an investment in five minutes or less, take a pass.”
? Transparency, which he said mutual funds like Vanguard’s already offer, but with many other investing vehicles, that’s not the case.
? Candor, which he said meant “being out front, being up front, and being honest to a ‘T.’ It’s tempting when things are going bad to stick your head in the sand, but you have to acknowledge when things are bad.”
As for the financial services reform bill, McNabb predicted that a law would be passed by President Obama’s July 4 deadline, saying that any final law, regardless of its specific tenets, would “be a good thing–there are basics in the financial services reform bills that are necessary to restore trust.”
Those basics include:
? Dealing with systemic risk. “We’re big fans of some form of systemic risk council, but we have to have the right regulators on the council, and there has to be in-depth sharing of information–we have to break down the barriers among regulators.”
? Derivatives regulation. McNabb said this is “probably the most polarizing part” of reform, but cautioned that Congress should be careful in how they regulate derivatives: “They’re an incredibly essential tool we all use to manage risk.”
? Swaps. He said they “need to be centrally cleared; that will mean more transparency.”
? Too big to fail. McNabb said “one of the good steps in reform is some sort of Resolution Authority,” which would control “how you unwind a firm after it fails.”