John Bogle: Broker Behavior Costs Investors

April 01, 2015

Vanguard founder and legendary investor John Bogle gives an exclusive interview to


Last week, Securities and Exchange Chairwoman Mary Jo White said publicly that the SEC is committed to independently formulating a unified “fiduciary standard” that requires all financial intermediaries to put their clients’ interests before their own.


Digesting all the attention "fiduciary duty" is getting in Washington, D.C., these days, John Bogle said the issue is now getting the attention it deserves. But in this the first part of a two-part interview with, Bogle also argued that a simpler answer that would eliminate the need for all the interagency deliberations is already right under our noses.


He told Managing Editor Olly Ludwig that verbiage within the original Investment Company Act of 1940 is already in place that would give the SEC all it needs to require all financial advisors and brokers who handle client money to put their clients’ interest first when it comes to handling their money. But the 85-year-old legend is resigned to the possibility that he won’t be around to see how this lifelong pursuit of fiduciary standards plays out. What matters most to you now as you look out there and see what's going on?


Bogle: Certainly, one of the most important things is to finally establish a federal standard of fiduciary duty for everybody that touches other people's money. Everybody.


And it's a peculiar thing that the White House is working through the Labor Department to get a fiduciary duty for registered investment advisors on retirement plans and fund contribution plans and that the SEC is kind of standing back. I think it’s had a little awakening with all this publicity that the president has given to the need to fix the system.


But it's not only that. Dodd-Frank is a funny law. It empowers the SEC to look into issues surrounding what you and I would call fiduciary duty, although it doesn't come with that word in the Act.


Yet it does not include money managers. Money managers are running $14 trillion in the United States of other people's money. If they can be ignored in terms of fiduciary duty, what's the point of fussing around with a lot of other things?


It's going to take longer than I thought. It will take, I'm sure, longer than I live. But the arc of finance is bending toward indexing and fiduciary duty. How did it come to pass that there are two sets of standards—one for RIAs who must put their clients’ interest first, and one for brokers who hew to a “suitability standard” that prevails in the brokerage channel? It’s a mess.


Bogle: Well, it really is a mess. The NASD [National Association of Securities Dealers] standard with suitability goes back a long way. And the standard of fiduciary duty for registered investment advisors is really not directly in the law, but in a couple court interpretations, including the Capital Gains Research case, where the courts made it very clear that fiduciary duty [putting the client’s interest first] is part of giving investment advice. It was the courts rather than the law.


Also, there's a mention of fiduciary duty in some peripheral sections of the ’40 Act amendments. But in the ’40 Act itself, there's nothing about fiduciary duty, but there is this statement in the principles of the Act: “Mutual funds must be run in the interest of their shareholders rather than in the interest of their officers, directors, investment advisors and distributors.”


That is a fiduciary duty standard. But they don't take it anywhere from there.



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