Bogle: Investors Are Now Driving Ethics

April 08, 2015

It’s been about 40 years since John Bogle created investor-owned Vanguard Group and the first index fund. In the intervening decades, Vanguard has become the biggest mutual fund company in the world, and the humble index fund has become the centerpiece of the ETF revolution.


The implications are profound, as the 85-year-old legend made clear when caught up with him in a recent telephone interview. In the first installment last week, Bogle extolled the fact that politicians and regulators are giving the pursuit of a unified fiduciary standard serious attention.


In this second part of the interview, Bogle argues that investors themselves are now encouraging more ethical behavior. Bogle said they are more in command than ever of how to keep costs lower and ensure the best possible outcomes. As such, they have become grassroots agents in the push toward better investment industry ethics and the increasing adoption of cheap, transparent indexing. You’ve told me that the arc of investment is leaning to indexing and a fiduciary standard. Can you explain that?


John Bogle: Let’s leave out the indexing piece for a moment, because that sounds kind of commercial. So, the arc of investment is leaning to a fiduciary standard. So, what are we talking about?


Bogle: Well, what we're talking about, really, is investors. First, there's a lot of examination in academia and elsewhere about the agency problems in the fund business. Conflicts of interest are everywhere. But the worst one is investors in funds whose management companies are owned by financial conglomerates and publicly owned.


That's where this phrase I bring up all the time comes in: “No man can serve two masters.” The funds share the directors of the funds and have a fiduciary duty to the fund shareholders, obviously; but they also have a fiduciary duty to management-company shareholders, the president of the fund, for example, and the president of the management company. That’s two fiduciary duties that conflict, very obviously. And they conflict around the issue of cost, primarily. But a lot of other things follow from that.


The mutual fund, in the normal case, almost overwhelmingly is just the corporate shell that holds a lot of securities. It has no employees. It has officers and directors because it has to, but typically has not a single employee. Vanguard is the throwback to that. The mutual fund manager is the operating company of the fund.


It's hard for me or for anybody to tell you how all this balances out in terms of magnitude, but when I look at the ETF, the cash flow data for mutual funds in January, what do I see? I see the industry took in $16 billion and Vanguard took in $33 billion.


Is that telling us that nobody's noticing? No. If Vanguard survives, and thrives by indexing and low cost and a long-term focus and the element in diversification—those are all fiduciary duty issues.



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