VideoTom Higgins is on constant deadline. As the CFO of Vanguard's Fund Financial Services, he oversees the daily accounting of each of the firm's more than 150 funds, whose net asset value gets publicly reported at the end of each business day. In addition, FFS, which has 325 employees, is responsible for providing periodic financial statements on each fund, which have varying year-ends. "Twelve months out of the year, we're doing a financial report for a group of funds," Higgins lamented in a recent interview with CFO.com.
Still, Higgins doesn't appear to mind, as he has spent his entire career in the same industry and most of it at the same firm. After spending most of the first 10 years of his career auditing investment companies for Price Waterhouse, Higgins joined Vanguard more than 20 years ago and assumed his current title last year. His group also deals with the funds' taxation, compliance requirements, securities lending, and treasury functions. He will talk about how Vanguard has been working to restore confidence in money market funds and securities lending at the CFO Core Concerns Conference in Boston on June 15-17.
In this edited version of an interview with CFO.com, Higgins describes his career and his position as one of the privately held investment firm's three finance chiefs.
How does your role fit into Vanguard?
We have two sets of entities. There's the corporate group of entities under Vanguard Group Inc., which is a sort of parent company. And then there's the mutual funds. We've got more than 150 mutual funds as well as other investment pools. I was always the treasurer of those funds, responsible for the group we call Funds Financial Services, or FFS, and reported to Vanguard's CFO. Vanguard's the name of the company we work for, Vanguard's the company that pays us.
Nobody works directly for the funds. We used to have one CFO, Ralph Packard, who was on the corporate side. When he retired last year, they split his role into two, basically. Richard Carpenter became Vanguard Group's CFO, and they gave me the title of CFO of the funds, but essentially my job is unchanged. When Packard retired after 20 years with the firm, they decided that the funds are a big enough business now that we need two CFOs. We report to Glenn Reed, managing director of the Strategy and Finance Group.
Do you interact with Richard Carpenter?
Absolutely. He's a guy I've known for 30 years or so, we have a great relationship. There's a lot of back and forth between the corporate side and the fund side. What makes us different from everybody else in the mutual fund business is that the funds really own Vanguard. It's a "mutual" mutual-fund company.
[Our competitors] are organized so that their corporate entity is owned either by a private group of investors or a public company. In our case, the corporate entity is actually owned by the funds. The funds are self-administered, we have our own transfer agent, we have our own accounting areas. All that stuff is basically done for the funds by a company that the funds own. The funds end up paying all of Vanguard expenses, so his side sets the expense ratios of our funds and then we accrue those on the funds' books every day. And we provide the cash he needs to run Vanguard's ongoing operating expenses. Those are the two principle interactions between the two groups.
How do your job responsibilities differ from Carpenter's?
He is more of a classic CFO. He helps out with business planning, budgeting, financing and capital needs, paying bills, procurement, and those kinds of things. On the Fund Financial Services side, I've got probably 25 or 30 business units that essentially keep the books and records of the mutual funds and interact with all the investment managers for all the funds. We're a bit unique in that some of our funds are managed in-house. Some are index funds, some are money market funds, and some are shorter-term bond funds.
We also use approximately 25 outside money managers. As those investment advisors are making transactions, buying and selling those bonds and securities, and money market instruments, they've got to communicate to my group so we can record it on the funds' books.
Then what happens?
The Investment Company Act of 1940 dictates a lot of what we have to do on a day-to-day basis in order to account for the funds. My group calculates the NAVs [net asset value] of each fund you see in the paper or online every day. Commercial CFOs close their books four times a year when they release their quarterly earnings. And they release their quarterly earnings about two weeks after the end of the quarter.
But when you compare that to mutual funds, the 1940 act says you have to keep your books on a liquidation basis in order to be fair to all the shareholders who are coming in and out of the funds every day. For those 150 mutual funds, some of them offer more than one share class, so essentially we have 350 different shareholder classes that we have to keep the books for.
So instead of one company, we have 350 different companies. We don't close our books four times a year, we close our books 260 times a year, which is the number of business days in a year. We can't wait until two weeks after the end of the quarter— we have to be ready by 6:00 that day. It's 350 funds every day and we have be done in an hour and 45 minutes so we can get it out to the online services and the other record-keepers who are selling our funds.
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