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April 21, 2010 at 08:00 PM
There’s much talk in the industry and in legislative and regulatory circles about a fiduciary standard for individuals and financial institutions that deal with the public. John C. Bogle would like to expand that discussion to include mutual fund managers.
“I would like to have a federal statute of fiduciary duty requiring managers to put the interests of their shareholders first,” the 80-year old founder of Vanguard and creator of the first index mutual fund said in an exclusive interview with Investment Advisor in April. “That would be pretty extreme. If you believe in the Biblical caveat that ‘No man can serve two masters,’ all these funds that are owned by conglomerates and the public are serving two masters and paradoxically those big financial conglomerates have a fiduciary duty, not only to the mutual funds, but to their own public shareholders.”
What Bogle says ends up happening is that the emphasis is placed on delivering returns to the shareholders in the firm that runs the mutual fund, rather than delivering returns to the real owners of any fund, the shareholders.
Offering an historical perspective, Bogle explains that in the early days of the mutual fund industry, mutual funds were run by partnerships and firms that were owned by their principals, who in turn were more likely to feel fiduciary obligations to their shareholders. “You would buy those securities and hold them for a long time and charge the investors reasonable amounts of money for your services. It was a good way to invest for a lifetime, the old mutual fund industry,” he explained.
With the growth of the industry and the consequent domination by gigantic financial corporations, Bogle believes the emphasis has shifted from investing to speculating, resulting in much higher turnover (and thus increased expenses) in fund portfolios and more frequent shareholder redemptions. “If short-term speculation is folly and long-term investing is wisdom, we’ve moved down the road from wisdom to folly,” he notes. “And somehow that disease, if you will, has been communicated to mutual fund shareholders.”
