If Your Clients Know As Much As You Do, How Can You Keep Them? Jason Zweig, Columnist Money Magazine AIMR’s “Leading Your Firm Into the Future” Conference Boca Raton, Florida December 7, 2000

Lipper rankings for the 12 months ended... 9/30/97 1 out of /31/ out of 755 3/31/ out of 789 6/30/ out of 820 9/30/ out of /31/ out of 953 Source: Lipper Inc.

Why Do Beliefs Die? You predicted that:  Your style of investing would continue to generate high returns for years to come;  Your portfolios would remain consistently in the top quartile;  You could maintain high outperformance and low tracking error simultaneously. Result: Your predictions were wrong, and your clients are deserting you en masse.

Why Don't Beliefs Die? * The Rev. William Miller predicted that the Second Coming of Christ would occur on: April 23, 1843; March 21, 1844; October 22, Result: The world may not have ended, but the Seventh-Day Adventist Church today claims more than 11 million members worldwide. *The Rev. Charles Taze Russell and his followers predicted that Christ would return "in the flesh" in: 1873 or 1874; 1881; 1914; 1918; Result: The ultimate "harvest" may not have occurred. But the Jehovah's Witnesses, founded by Russell, now number more than 3.5 million worldwide. Sources: Jon R. Stone, Expecting Armageddon: Essential Readings in Failed Prophecy (Routledge: New York and London, 2000);

How to Keep Beliefs Alive  Successful movements feature charismatic founders or dynamic followers as their public "face";  Their predictions are only a small part of a complex system of belief;  They have large numbers of loyal and vocal followers;  They foster a cohesive community with shared values and a strong sense of "belonging." Source: Jon R. Stone, Expecting Armageddon: Essential Readings in Failed Prophecy (Routledge: New York and London, 2000).

July 26, 2000 New Vanguard Program Rewards Largest And Most Loyal Retail Shareholders VALLEY FORGE, PA, July 26, 2000 – Citing the cost efficiency of large accounts and long-term, highly loyal shareholders, The Vanguard Group today announced a new program that provides substantial rewards to its largest and longest standing retail shareholders. Under this new program, retail shareholders—both regular and IRA—who hold $50,000 in a fund account they have maintained for 10 years or more, or $150,000 in an account held for 3 years or more, will be eligible for Vanguard’s new “Admiral” class shares. Recognizing the cost efficiency of larger accounts, Vanguard will offer the Admiral shares immediately to investors with $250,000 or more in a retail fund account. Admiral shares will have administrative expenses that can be 25% lower than the already industry-leading low-cost traditional Vanguard fund shares (“Investor” class shares). For example, the Admiral class shares of Vanguard 500 Index Fund will have an expense ratio of 0.12%, versus 0.18% for the fund’s Investor class shares. Thus, a shareholder with a $300,000 account in the fund will save $180 per year. “Our loyalty program reinforces intelligent investing principles that we believe are fundamental to investment success: 1) take a long-term view; 2) cost matters; 3) avoid duplicative accounts and overdiversification; and 4) frequent trading of fund shares is a loser’s game,” said Vanguard Chairman and Chief Executive Officer John J. Brennan. “A quarter-century ago, Vanguard revolutionized the mutual fund industry by creating a mutual fund company that focused solely on serving the mutual fund shareholder,” said Mr. Brennan. “Today, we are revolutionizing the industry again by segmenting fund fees in a way that captures the beneficial effects of loyalty and economies of scale, and delivers their resulting cost savings directly to the fund shareholders who earned them. “Our new Admiral share class reflects the simple reality that large accounts and loyal shareholders create tremendous cost savings for all fund shareholders,” said Mr. Brennan. “These shareholders should receive the benefits of that cost efficiency.” Mr. Brennan noted that Vanguard’s new Admiral shares reflect the important reality—one that is becoming increasingly rare in this era of rapid- fire trading of mutual fund shares—that it is more cost efficient to keep a shareholder’s account than it is to acquire a new account. “The costs of acquiring and establishing a new account are significant and rising, and in the mutual fund industry those costs are disproportionately borne by long-term shareholders,” said Mr. Brennan. “In addition, retail shareholders who have maintained sizable accounts for a long period of time and have not caused a fund to incur transaction costs are very desirable. These loyal individual shareholders—who hold their shares longer than the current 2-1/2 year industry average—should share in the higher level of cost efficiency that they bring to a fund.

“We believe that our new loyalty program is truly innovative, for it enables shareholders of even relatively modest means to receive the full benefits that accrue from long-term loyalty. For example, an investor who had $10,000 in a Vanguard Index 500 Fund account a decade ago, has never added to it, but has reinvested dividends and capital gains distributions, now has the $50,000 necessary to qualify for the Admiral class of shares,” said Mr. Brennan. The Admiral class shares will be offered initially on Vanguard’s index funds in the fourth quarter of this year, and under current plans will be phased-in for most of Vanguard’s equity, bond, and balanced funds over the following 12 months. Shareholders who wish to convert their existing shares to the new Admiral class of shares may do so generally without incurring any tax liabilities (a conversion from one class of shares to another in the same fund investment is not a taxable event). To keep administrative costs of the Admiral program low, eligible shareholders with less than $250,000 who want to convert to the Admiral class of shares must have their accounts registered for online access through Vanguard.com. Requests for conversion from these shareholders will be accepted through an online exchange request at the Vanguard.com website. Unlike e-shares, however, Vanguard’s Admiral class shares are not restricted to those who use online services. “This is an excellent example of our new ‘clicks and crew tm’ complementary approach to shareholder service,” said Mr. Brennan. “Shareholders may use our website for prompt access to information or to arrange account transactions at any time. If they prefer, or if they desire more personalized service, they may contact a member of our crew for assistance. Our goal is to provide the best service regardless of the delivery channel selected by a shareholder.” Vanguard expects that the creation of Admiral shares will have only a minimal effect, if any, on the expense ratios of a fund’s Investor class shares. The impact on a specific fund will depend on net cash inflows and the cost characteristics of that fund. For example, continuing strong growth in assets in the 500 Index Fund is expected to enable Vanguard to maintain that fund’s expense ratio at its current 0.18% expense ratio. In certain funds, expense ratios may increase slightly at first, perhaps two or three basis points. Such a rise would be less than the recent increase in industry average expense ratios of four basis points (from 1.27% in 1998 to 1.31% in 1999). These Vanguard funds will therefore continue to have expense ratios nearly one-fifth the industry average. “We have, more than anyone else, demonstrated that there are significant economies of scale in the mutual fund business,” said Mr. Brennan. “We have brought these economies of scale to our shareholders over the years. Now we are pleased to deliver to our largest and most loyal retail shareholders a new level of the benefits from these economies,” said Mr. Brennan. The Vanguard Group, headquartered in Valley Forge, Pennsylvania, is the nation’s second largest mutual fund firm. Vanguard serves 14 million shareholder accounts and manages nearly $570 billion in net assets. Vanguard offers 109 funds to U.S. investors and 33 additional funds in international markets.