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Channeling its inner BlackRock as bull market teeters, Vanguard Group gets constructively paranoid by creating chief risk officer role with big power including vast new software applications

With Aladdin overtones, the Malvern, Pa. asset-manager puts Joseph Brennan in charge with big stress testing on the agenda

Friday, October 19, 2018 – 7:41 PM by Oisin Breen
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Tim Buckley: Centralizing our risk management functions under a single senior leader will benefit both our clients and Vanguard.

Brooke's Note: Vanguard Group is probably the last firm you'd think of as needing risk management. Leverage, overhead, risky investments, illiquid investments or consolidated positions pretty much don't exist. Then again, Vanguard is taking plenty of risks to avoid becoming stale with its foray into financial advice as one obvious example. CEO Tim Buckley again last week promised "index-like" fees for advice. Expect more risks in hires, if nothing else. But here comes a new risk-management approach. It will no longer be, 'I got it. No, you got it' to chase fly balls in the proverbial outfield. Now Joseph Brennan's got it.

Vanguard Group is suddenly getting serious about risk management. As the giant $5.2 trillion asset manager becomes a larger, more complex organization, it's exposure to a major stock market correction has been amplified.  

Should the nine-year bull market suddenly head south as some analysts believe, Joseph Brennan, (not to be confused with former CEO John Joseph Brennan) the firm’s first chief risk officer, will be the point-man. He'll be aided by radically expanded use of risk software previously used only to oversee pensions but now applied more broadly to the Vanguard mother ship, according to the company. 

John Brennan
Joseph Brennan: Risk governance and coordination across our diverse business and operations is vital to protecting our clients, as well as their data and assets.

That's a sharp departure from past practice. Until mid-September, Vanguard managed risk through a series of disparate fiefdoms. Information security was run separately from enterprise risk, as was investment risk management. Physical security was a third category.

Brennan, 49, has also stepped up to join Vanguard’s senior leadership team, according to the firm. This makes him the the 12th member of a group, which has undergone significant change in the past six years. He's also a member of the firm's radical youth movement. See:  What Vanguard's hire of a sizzling Wall Streeter reveals about Bill McNabb's determination to avoid the whiff of stale passivity

James Norris, the managing director of Vanguard International,remains as the sole legacy member.

Having a CRO [chief risk officer] means greater fiduciary care of the enterprise and the clients -- in theory one and the same at Vanguard-- says Vanguard CEO Tim Buckley in a release.

"We believe centralizing our risk management functions under a single senior leader will benefit both our clients and Vanguard," he explains.

'Other people's money'

In its earnings call this week, The Charles Schwab Corp. also addressed macro risk.

"Companies separate themselves from a market share standpoint usually in difficult times," said its CEO, Walt Bettinger. "And at Schwab, we have a long history from a risk management standpoint of being very diligent, very careful. We know what's on our balance sheet, it's OPM. As we like to say, it's other people's money."

Ultimately Vanguard determined that it's better for the the right hand to know what the left’s doing, says Brennan, via email.

"Risk governance and coordination across our diverse business and operations is vital,” he said. 

Other benefits can accrue to ramping up risk management. 

By better watching its back, Vanguard and its clients can cut costs, and reduce exposure to losses, especially through forecasting, says Christopher Phillips, head of Vanguard’s institutional advisory services, in the release.

Vanguard declined to answer when it chose to take these steps to centralize risk; to elaborate on its reasons for doing so; to address its impact on its products and what, if any, lay-offs might occur as duplicate roles get pared down.

Competing aggressively

That said, attention to risk across wealth management has been soaring of late at both a macro and micro level with companies like StatPro, Finmason, Totum, Riskalyze and Hidden Levers getting oars in the water with software products. 

Christopher Phillips
Christopher Phillips: It’s critical that organizations truly understand the risk exposures within their portfolios.

In addition, BlackRock is aggressively seeking to use its industry-leading Aladdin capability in the advisor market. See: BlackRock may build the biggest, baddest RIA platform yet as 'Boy Wonder' begins 'Aladdin-izing' FutureAdvisor

Right now Envestnet, Aladdin and Hidden Levers are competing aggressively for the Focus Financial account, according to multiple sources.

At Vanguard, RiskFirst got a trial run. 

Vanguard's pension clients have used it for two years. Now the asset-manager's institutional non-profit clients, and its outsourced chief investment officer scheme have been brought under its watch.

The intention is to use RiskFirst's stress testing to measure potential scenarios that could impact cash flows at endowments, foundations and pension funds, says Phillips.

Paid his dues

Prior to his appointment as CRO, Brennan, a 24-year Vanguard veteran, most recently headed up its equity index group, and has previously served as as the firm’s chief Asian investments officer, and its head of portfolio review. The equity index group oversees $3.1 trillion in 320 mutual funds and ETFs, representing 60% of Vanguard’s managed assets, and 80% of its 400-strong fund pool.

He started at Vanguard in 1991 as an associate and analyst. Aside from a three-year stint in the mid-nineties as a corporate bond trader at Metropolitan Life Insurance Co. in New York City, he has spent his career at Vanguard, according to his LinkedIn profile.

He's more than paid his dues and knows Vanguard's business from back to front, says Buckley.

“Joe’s vast and varied investment management and leadership experience both in the U.S. and abroad make him the ideal candidate to integrate and enhance our capable and strong global risk management teams,” he says.

Brennan obtained his BA in economics from Fairfield University in 1991, and an MS in finance from Drexel University in 1994. Last year, he polished his skills with an advanced management program at Harvard University .

Musical chairs

Rodney Comegys
Rodney Comegys: [Vanguard has] a deep bench of indexing experts with exceptional technical and regional experience.

Vanguard’s decision to appoint a chief risk officer and centralize its risk management has also caused a small case of musical chairs.

The former head of the firm’s risk management group, Rodney Comegys, 49, replaces Brennan as head of index equity, and Manish Nagar, previously the global head of investment risk, steps into Comegys shoes.

Comegys promotion gives him the chance to show his mettle, says Buckley. “Now he will have the opportunity to lead Vanguard’s largest investment group.”

Like Brennan, Comegys has slowly been climbing the Vanguard ranks. He joined the firm in 1999, after six years as an officer aboard a US nuclear submarine, and is both a Harvard (MBA), and University of Pennsylvania (BA) alumnus.

Third lifer

The last of the executive moves Brennan’s promotion entailed saw Nagar step up from his previous position as Vanguard's global head of investment risk to lead its risk management group.

Like Comegys and Brennan, Nagar is a Vanguard long-termer, having spent 18 years in a number of roles. Nagar also attended Harvard's investment management program. He obtained his BA from Bangalore University, and his MA in technology from the Wharton School.

In full, Vanguard’s management team consists of Buckley, who replaced Bill McNabb as CEO effective Jan. 2, 2018; Greg Davis who in-turn replaced him as chief investment officer; Michael Rollings, (chief financial officer); Brennan (risk); Anne Robinson, (general counsel); John James, (chief HR officer); and managing directors Martha King (institutional investing); John Marcante (IT); Chris McIsaac (planning and development); James Norris (international operations); Thomas Rampulla (financial advisor services); and Karin Risi (retail investment).

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