John Bogle: Broker Behavior Costs Investors

April 01, 2015 To return to the policy angle, you talked about the Labor Department a moment ago and about the SEC's effort. Can you walk me through mechanistically what may happen?


Bogle: First, there's got to be substantial cooperation between the Department of Labor and the Securities and Exchange Commission. And the Labor Department release is very clearly only about retirement plans.


The investment side of it is across the street in a different agency; that being the SEC. And that is a very peculiar dichotomy. It's never going to be resolved by one or the other; it's going to have to be resolved by both. The Labor Department thing can go through and the SEC doesn't need to do any acting; it'll be through and that'll be a responsibility for RIAs.


But it has to go further than that. There are too many holes in the agency system that we know of in finance. It's a big issue about too many conflicts of interest, too many divided loyalties, too little attention to cost, too little attention to the long run and the focus on the short run. All these things are fiduciary issues.


The SEC can do a lot of that regulation—particularly because it’s got the Act. If they would read the Act, and just do what it says, I would be a happy camper. Are you referring to Dodd-Frank or the amendments of the ‘40 Act passages you spoke about a minute ago?


Bogle: This would be the ’40 Act. All they have to do is interpret that section of the Act in the policy section: “Mutual funds should be run in the interest of their shareholders, rather than in the interest of their officers, directors, advisors and distributors.” So you're saying the SEC could invoke the original language of the ’40 Act and essentially create a new law of the land that would instantly bring a fiduciary standard to the brokerage channel?


Bogle: Let me be clear on that: A new law of the land has to go through Congress. But the SEC can have an interpretation of the ’40 Act, and I don't see why they can’t have an interpretation, because the Act says to put the interest of mutual fund shareholders ahead of all the others. Do you see any partisan variables here that are worth teasing out?


Bogle: It's funny you ask that, because it could be so nonpartisan, so it's sort of unbelievable that people take sides. It does seem like liberal versus conservative. And the liberals want to go ahead with this, and the conservatives don't.


Part of it has to do, I suppose, with the role of government in our lives. This is more government, more rules and regulations. And I'm not a believer at all in a high level of regulation. But the industry has earned it. If you had a good standard of behavior in the first place, we wouldn't even be discussing this today.


A lot of people have been injured. High costs are a huge, very expensive drag on returns. Jumping back around from one fund to another investment activity is basically the enemy of the investor. If that comes out, you better sell this fund and buy that one.


And that's why fund returns—or I should say the returns that investors earn on funds—are almost universally behind; they lag the return the funds report. That's investor return versus fund return—or in a more complex way, unit-weighted performance measurements compared to dollar-weighted performance measurements.


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