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.

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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.

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