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John Bogle: RIAs Are the Future; Trading Is Investors’ Enemy

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John C. Bogle, 89, legendary founder of the Vanguard Group and the first index fund, is busy publicizing his new book despite undergoing pacemaker surgery just two weeks ago to control the rhythm of his nearly 23-year-old transplanted heart. No doubt this man was made to stay the course.

Indeed, “stay the course” is Bogle’s motto in life as well as in investing, as he told ThinkAdvisor in a wide-ranging interview.

Bogle was chairman and CEO of Vanguard until 1996, senior chairman until 2000. Today he is president of the Bogle Financial Markets Research Center, separate from but subsidized by Vanguard.

With about $5.3 trillion in assets under management, Vanguard is the world’s largest mutual fund company.

In the interview, the staunch buy-and-hold advocate — known as Jack — argues that the increasing importance of the RIA business and the relative “diminution of the brokerage business” largely accounts for index funds’ heightened popularity.

In “Stay the Course: The Story of Vanguard and the Index Revolution” (Wiley-Nov. 2018), the industry pioneer relates his intention, some 40 years ago, to provide folks with low-cost investing.

He accomplished that by devising a new and different structure for the mutual fund company he started. A year later — 1975 — he created the world’s first stock index mutual fund.

Initially, the fund was met with disdain and derision, especially by brokers, because its design was no-load.

Trading, Bogle argues, is “the investor’s enemy”; and he has made no secret of his reservations about exchange-traded funds. In the last few years, however, he has viewed ETFs somewhat less harshly. Vanguard is the second-largest ETF provider; BlackRock, with its iShares, is No. 1.

Our interview ranged from Bogle’s opinion of Fidelity’s no-fee funds (thumbs down, of course) to his monetary interest in Vanguard (none) to his economic interest in T. Rowe Price (a little bit) to allocation of his personal portfolio (50%-50%).

(Related: Bogle’s 6 Best Books for Investors)

At one point, he gave a nudge to Vanguard management concerning recent glitches in the firm’s digital service, which has caused erosion in robo-customer satisfaction.

ThinkAdvisor recently interviewed Bogle, speaking by phone from his Pennsylvania office. Among other topics: his reaction to critics who, upon debut of the first index fund, dubbed it a dumb idea.

On a personal note, he talked about his recent pacemaker surgery. By age 32, he’d had his first heart attack. At 65, hospitalized, he was being kept alive intravenously. After 128 days of that, the heart transplant saved him. Bogle is one of twins born in Montclair, New Jersey, about six months before the 1929 market crash. In the interview, he gives twin brother David a big shout-out.

Here are excerpts from our conversation:

THINKADVISOR: What do you think of Fidelity’s introducing no-fee index funds?

JOHN BOGLE: Fidelity has figured out that the only way to get big in this business is to charge nothing, or more accurately, to have zero-cost index funds that are subsidized by the shareholders of their other funds. I’m not so sure I like that as an ethical issue.

It took 20 years for the first index fund, which you created, to get investor acceptance. What about broker acceptance?

At first, the index fund had almost no broker acceptance because it was no-load — there was nothing in it for brokers, no incentives. I had eliminated all sales commissions overnight.

Do they accept them now?

With the rise in the importance of investment advisors, a diminution of the relative importance of the brokerage business has emerged. That, along with growing recognition of the index fund’s attributes, explains a) why they’re doing so well and b) why it took so long.

To what extent do advisors object to index funds today?

A lot of brokers still don’t like us — don’t like me. If I were them, I guess I wouldn’t either because I’ve changed the nature of the world of finance — and not in their favor.

How did you feel when critics called the first index fund “Bogle’s Folly”? Did you think they could be right?

Oh, no-no-no. I always knew I was right. In this business, there’s cost and value. The more you pay as an investor, the less you get — and the less you pay, the more you get.

What’s in your personal investment portfolio?

I’m 50% bonds — 50% Vanguard bond funds — and 50% stocks. Half the time I wonder why I have so much in stocks; the other half, I wonder why I have so little.

You’ve made money from buying 100 shares of T. Rowe Price at $42 a share in 1994. By 2018, that “token” investment was worth $384,000, you write. This puts you in an “awkward” position, so you say. Please elaborate.

I have an economic interest in T. Rowe Price, which is a [Vanguard] competitor. At Vanguard, that would not be allowed for the officers. In my case, my association with Vanguard — and this is the awkward part — is only tenuous.

Do you have a financial interest in Vanguard now?

No. None. Let’s just leave it at that.

(Related: Bogle’s 6 Best Books for Investors)

What’s your advice to investors in this very volatile market? I bet it’s to stay the course!

Stay the course. What seems different about this time of extreme volatility is the rapid reversals: first up 1% or 2%, then down 1% or 2%, then up again. When stocks go way up, human emotion makes people excited about buying more; when stocks are way down, they’re frightened into buying less or selling out. Buying at the highs and selling at the lows isn’t an easy way to make money on your retirement plan.

The cover of Bogle’s recently published book.

In a 2012 interview with me for Research magazine, you argued that “active management is a loser’s game.” I assume your thinking hasn’t changed?

Brokers like funds that are actively managed because they can make commissions on them. We live in a changing world, but sooner or later the investor is going to do what his own best interests tell him, and his own best interests are to stay the course and do nothing. Don’t trade or pay extra costs, and you’ll do fine.

You stated in that same interview: “It’s nuts to have ETFs in a 401(k) plan.” Still feel that way?

Yes. We know that employees like to trade company stock, which is an indication that they’re not sophisticated enough to know that simplicity and low cost are the way. The investments in 401(k)s aren’t designed to be traded. They’re designed to be bought and held forever. Trading is the investor’s enemy, by definition.

ETFs have overtaken traditional index funds (TIFs) in popularity. But you’re forecasting that the “the vast majority of investors will come to favor” TIFs over ETFs. Why?

TIFs are by and large based on large-cap indexes — they’re passive portfolios designed for passive investing. ETFs are trading the market on a daily basis, betting it will go up or down. [Moreover], leverage [ETFs with leverage] has nothing to do with investing and everything to do with speculation. Trading ETFs, you have no idea whether you’ll do better than the market’s return or worse. Every bit of evidence says you’ll do worse.

Three companies — Vanguard, BlackRock and State Street — dominate the field of index fund assets, you write. You’re calling for more competition. Why are there only three?

Vanguard is long-established and has taken the economies of scale to the point where we operate the entire firm for about 10 basis points a year, and the index part of it for about six basis points a year. I don’t know how anybody else can grow to those kinds of levels and produce economics of scale when they start with no economies of scale. The other thing is: This group of three is quite entrenched.

What’s your take on the robo-advisor concept?

Robo-advisors depend on ETFs. If they’re selling a lot of junk — speculative index funds — clients are going to do badly and ultimately [the firms] will do badly. Vanguard has a superior robo system because clients have individuals they can talk to. Let’s call that robo-plus.

Vanguard has had glitches with his digital service and a particularly bad one on Oct. 10. A survey shows that customer satisfaction in the firm as a provider of such services has dropped. Please comment about last month’s malfunctions.

I don’t know anything more about it than you because I’m here [at the Bogle Center] in my independent existence. I don’t get any information form Vanguard. But this is something that can’t happen often — or the shareholders will get after [the firm]. There was a large number of comments on the Bogleheads website that suggest a very high level of dissatisfaction, and one can only say they were right. The management says they will fix it. We’d better get our act together.

What’s been the biggest challenge of your career?

At the beginning [of Vanguard], we had a failed manager — terrible performance in the era preceding Vanguard’s formation — shrinking assets in the middle of a [long] run of net redemptions. We had a new company name, weren’t allowed to get into marketing as distinct from investment management. And we had a structure that had never been tried before. How could a company like that possibly succeed?

So what’s your key strength, the one that’s helped you most?

There are two: determination and skepticism. I need a little proof: trust but verify. That’s kept us out of doing a lot of really dumb things that other people in the business have done.

Any regrets?

No regrets. I’m not a “trillionaire” like Abby Johnson [Fidelity chairwoman], who is supposed to be worth [$15.4 billion]. I wouldn’t even know what to do with a number like that. We have a nice, small house. We have shelter when it rains, snows or is windy. The kids and grandkids are well. I have the Armstrong Foundation, which has now reached a decent size — and I feel like it could do some good for others.

You write that you’re idealistic. How does that manifest today, if it does?

I’m deeply concerned about the change in America that’s taking place — an abandonment of many of our great traditions. Let’s start with the Declaration of Independence and the Constitution, and the legislative, executive and judiciary separation of powers. Let’s go on to the Supreme Court — you see changes there, and big changes are coming. I want to protect all those things — our way of life, American exceptionalism.

Anything else that concerns you deeply?

The wealth [spread] between the rich and the poor is growing in a huge way. Relationships between black and white certainly aren’t getting any better; I would argue, they’re getting worse. We have to be one nation, but we’re moving in the opposite direction. We have to resolve these problems.

What should be done?

We have to take care of those who aren’t as fortunate as we are. I’m the most conservative person in America. I’m so conservative that I’m liberal.

If you hadn’t gone into financial services, what career do you think you would have pursued?

I was interested in banking, but I probably would have gotten into the cashier’s booth and panicked every afternoon making sure the books would balance for the day. I’d probably still be doing the same thing when I retired. That’s kind of tongue-in-cheek!

What’s your biggest contribution to the world?

If there is one, I think it’s helping investors do better than they otherwise would. In this business, ideas are designed to serve the producer or the salesman rather than the client. It’s just a bad system. My investment philosophy is one of simplicity and economy, and putting the investors first. In this new order of things, we’re going to see a lot more of that.

What specifically do you forecast for the mutual fund arena?

This industry will have to mutualize at some point.

Anyone who handles other people’s money should be subject to the fiduciary standard, you write. Please elaborate.

The fiduciary standard applies only to investment advisors and not to mutual funds or stockbrokers. So the [business] exists under two different sets of rules. It makes no sense at all. But to change the system is apparently a policy issue. The Republicans don’t like [requiring] fiduciary duty, and the Democrats do. It seems crazy to me how anybody could be against fiduciary duty. But I think investors will see through that and will go to firms that operate as fiduciaries [even without an FA fiduciary rule].

You had a heart transplant almost 23 years ago when you were 65. How’s your health now?

The heart is getting a little worn and wasn’t functioning so well. So two weeks ago I had a pacemaker implanted. It’s not an easy job with a transplanted heart, which can get stiff. It’s hard to [connect] the pacemaker wires. But I got through it OK. I’m not complaining, by the way.

You sound like you’re recovering quickly!

I fake a lot — I put on a good front. I still have a deep voice!

In your book, you mention having a twin brother. Did he choose financial services, too?

He had a perfectly normal, successful career in advertising. After that, he went into education and was director of development at the Princeton Day School.

Does he work nowadays?

He retired at 65 and died six months later. I was dying and lived — and he was well and died. Go figure.

What caused his death?

He died after a demanding operation. A year later, I had my heart transplant. It was one of the saddest things in my life to lose my twin brother.

Were you identical twins?

No, fraternal. And were we different! He was much nicer. I was more competitive. He was probably the best Bogle.

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