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.
 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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