Bogle: Fiduciary Duty Comes Down to ‘Simple Mathematics’

Day after day, Bogle said, “more investors are becoming aware that costs matter,” what Bogle called CMH—the Cost Matters Hypothesis—which, he said, “simply reflects the obvious concept that investor returns are ultimately determined by, I emphasize again, the allocation of financial market returns between financial service providers and the investors they are duty-bound to serve.” Yet big fund groups seem to be oblivious to investors’ awareness of costs, he said.

“As I look around the competitive landscape, I see the apparent denial” of how much costs matter to investors. Noting his “great respect” for BlackRock chief Laurence Fink, Bogle said Fink’s position “in exchange-traded funds (ETFs) is caught on the horns of a nasty dilemma: On the one hand, he has a fiduciary duty to the shareholders of BlackRock to maximize assets under management, to maximize advisory fees, and to maximize profits. On the other hand, he also has a fiduciary duty to the clients of his mutual funds and ETFs to maximize their returns. Since BlackRock’s business is dominated by index funds, he can enhance their performance only by reducing fees.” BlackRock’s “considerable success” in recent years in the ETF marketplace “was increasingly threatened by competitors with far lower fee rates,” Bogle said. A few weeks ago, he continued, “Fink accepted the inevitable: slashing fees on some of BlackRock’s ETFs, and offering other similar copycat funds at competitive costs while maintaining present expense ratios of the originals.”

Quoting a Wall Street Journalarticle, Bogle said that “in being forced to make these decisions, Fink was not amused” as he “railed against competitors that ‘sell investment products at cost’ or without profit.”

Bogle quoted the Journal article, in which Fink said, “You can call that fee pressure,” adding that he had another word for it: “stupidity.”

A BlackRock spokesperson told AdvisorOne that Fink was referring to “institutional products rather than ordinary mutual or exchange-traded funds.”

However, Bogle’s response on Thursday was: “As the creator of Vanguard’s mutual ‘at-cost’ strategy way back in 1974, I accept the fact that, from his perspective, I’m stupid. But our tens of millions of Vanguard shareholders—now accounting for almost 20% of assets of all long-term mutual funds—don’t seem to feel the same way.”