Fiduciary Duty: The Big Mistake We're Making

Vanguard founder Jack Bogle argues for a federal standard of fiduciary duty for fund managers.

Mar 15, 2014 at 2:30PM

John C. Bogle is the founder and retired CEO of The Vanguard Group, the largest mutual fund organization in the world, comprising more than 160 mutual funds with current assets totaling more than $1.4 trillion. Since his retirement from Vanguard in 1996, Bogle has spent his time studying, writing, and speaking on the financial markets and mutual funds. He is president of the Bogle Financial Markets Research Center, created in 2000 to support his ongoing work on behalf of investors.

In this video segment, Bogle weighs in on whether an individual should ever own a load fund, and why the United States needs a federal standard of fiduciary duty to help solve the problem of short-term trading, high costs, and speculation versus long-term investment.

We hope you enjoy this exclusive interview with Jack Bogle, the father of index funds himself.

If you do, it may surprise you to learn that over the past two years, Motley Fool co-founder and CEO Tom Gardner has sat down with dozens of the world's brightest investors and business minds on behalf of his Motley Fool ONE members -- we're talking true American legends like Whole Foods co-CEO John Mackey, Costco founder Jim Sinegal, and Chipotle co-CEO Monty Moran.

On March 20, this "crown jewel" service will reopen to new members for only the third time ever. And to celebrate, Tom would like to offer you a front-row seat to watch these visionaries share the keen insights and unparalleled business acumen that got them to where they are in life.

Even if you aren't an investor, the business lessons you'll take from these conversations are priceless. So please click here to access our Motley Fool ONE member lobby and our entire collection of these interviews absolutely free of charge!

Tom Gardner: Just a few more questions. Is there ever a situation that you can imagine where an individual should own a load fund? They've sat down with a financial advisor. They watch this video, and they're looking though their portfolio as we're talking, and they see a number of funds that their advisor has put them in that carry a load. Is there ever a situation they should be happy about that?

Jack Bogle: I'd say unequivocally not. The advisor is going to sell you a load fund and say, "This no-load stuff is bunk. Here's the no-load index and this fund, even counting the 5% commission" -- which is roughly where they are today, although a lot of that has changed to advisory fees -- "even with that 5% commission, we did 50% better."

Well, hindsight is always 20/20. If they can't find a fund that beat the index, they can't be very acute. They can't be paying much attention. It's the easiest thing in the world to do!

But don't believe it. The past is not prologue, and actually if you look at the numbers carefully enough and long enough and thoughtfully enough, you'll see the past performance of the fund is anti-prologue. The better it is in the past, the more the regression to the mean; the greater that's going to be in the future.

Gardner: Do you believe that we will have a unified fiduciary standard or not? Are you optimistic about that? 

Bogle: Let me just say this. The issue is a very narrow issue at the moment, and that is the fiduciary standard for people who are selling funds -- investment advisors, fee-only investment advisors, stockbrokers, things like that; it's the firing line level -- I think we are making a very big mistake. I've written to the SEC three times about this, and that is the biggest problem on the fiduciary side is in the fund manager side. We need a federal standard of fiduciary duty for fund managers.

Look at what's going on at the Labor Department, and I've talked to them down there about this. You look at the fiduciary duty for a corporation and for the evaluator and for this one and that one -- but no fiduciary duty for the guy where you really need the fiduciary duty -- the fund manager.

We do need fiduciary duty. That would tend to get us out of this morass we're in of short-term trading, of high costs, of speculation versus long-term investment -- because it's the antithesis of trading -- and it would probably eliminate the conflict of interest that is obvious if your fiduciary has two sets of fiduciary duties.

One is the fiduciary duty to the mutual funds, and the other is the fiduciary duty to the shareholders of his publicly held company or publicly held conglomerate. Those two fiduciary duties are in direct conflict and so we, of course, quote the Bible: "No man can serve two masters," and then we add to that what Matthew quoted the Lord as saying right after that: "For he will hate the one and love the other."

Now in this business, who pays the portfolio managers? Who makes all the money? Who has all the public stock? The manager gets all the love. I won't say they hate the shareholders -- I wouldn't say that at all -- but they love the managers more.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool’s board of directors. The Motley Fool recommends and owns shares of Chipotle Mexican Grill, Costco Wholesale, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers