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.”
Bogle also observes that with the economies of scale that have been introduced as assets have risen and fund companies have grown, mutual fund costs should have gone down. They haven’t, and he says the simple reason is that most of those savings have gone into the pockets of fund managers than into the accounts of fund shareholders.
“That can not go on, particularly since the duty to the public shareholders in the firm, the stockholders in the marketplace, takes a much higher priority than your putting the shareholder where he belongs, as your sole interest,” said Bogle, who despite his age remains a fierce crusader for American investors. “So I’d like to have that federal standard of fiduciary duty saying shareholders come first, saying that fund managers have due diligence on security analysis, and also participate actively in corporate governance so we force our corporations to serve the interest of their shareholders, too.”
In two other separate Investment Advisor exclusive interviews, SEC Chairman Mary Schapiro commented on her commitment to the fiduciary standard, while Don Trone said the ultra-HNW are warming to that standard.
Editor-at-Large Bob Clark recently blogged on the unsung heroes of the fiduciary debate.