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2 Guarantees in the Financial Business

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 the commercial world, "value" can exist in many forms, some of them subjective. In the financial world, "value" means only one thing: dollars. In this video segment, Bogle discusses capitalism as it pertains to financial services, and why he thinks we may be headed to a fee-for-services model.

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Tom Gardner: You're a fan of capitalism.

If we look in the marketplace in finance and compare two actors out on the stage, one of them is a fee-only fiduciary financial planner with a basic flat fee dollar amount that sits down and builds a Vanguard-based, indexed, low-cost portfolio, acting as a fiduciary. The other is a financial advisor or broker.

I'm reminded of three that came to a book signing of ours in San Diego years ago and said, "You talk about the Vanguard Index Fund. It's really funny you say that. We now manage money. We've left the firm that we were at" -- in their case they were at Merrill -- and they said, "We couldn't sell the index fund to our clients because we couldn't make any money on it, but we all owned it ourselves."

It's the complete reversal of the fiduciary. It's like, "I will be fiduciary for myself," and then fiduciary with my relationship with you is, "If you're willing to buy what I'm selling, then I haven't done anything I should feel badly about."

The reality, though, in the marketplace is that the first actor -- the fee-only financial fiduciary -- is living a relatively lean existence in terms of the financial makeup, and the VP of the big investment firm has a country house and is making $1 million a year selling load funds and a whole bunch of booby traps in the portfolio to keep you locked into different products. How do you observe, and what conclusions do you draw, about capitalism given that?

Jack Bogle: Capitalism has a very funny manifestation when you get to the fiduciary duty of managing other people's money.

With most systems -- particularly when you begin with a new idea -- if you want to get it sold, you pay the salesman a lot of money, you advertise a lot, and you deliver 70 cents on the dollar, or something like that.

The investment business is really a business of mathematical candor. You can't hide. If you're selling a Mercedes-Benz, the salesman selling it is going to say, "Look at the value you're going to get. Your neighbors are going to be envious, Blah, blah, blah," whatever it is. And you like the diesel fuel, or the door slams nicely, or it's got a great sound system, or air conditioning -- I don't know what.

But in the financial business, value is one thing: dollars. It can be measured, unlike all these esoteric things that characterize capitalism. And once you get to measuring value, the problem becomes a very simple mathematical problem.

Now, how you get people to focus on that is a good question. How do you get them to focus on the role of cost in that, is a good question. How do you get them to think about the long term? Because in two or three or four years the difference in cost -- let's face it -- just doesn't matter.

But, over your investment lifetime, getting the market return in an index fund, or almost the full market return, compared to paying 2% -- which is roughly the right number for a managed fund -- means that you get, in the latter case, about $0.30 on the dollar; $0.30.

But you've got to look at 40 or 50 years. But these young people today -- say they're 25 -- 50 years is 75. That's too short! They'll live to 95. They should be looking at 70 years, and these numbers just get further and further apart.

A lot of people do need help, there's no question about that. But I think we have to rethink how we pay for that help. It may be that 1% is much too high -- although if you have a client with $25,000, 1% probably isn't nearly enough.

I think eventually you'll have a fee-for-service kind of thing, like a typical professional service -- lawyers, accountants and so on -- neither profession of which I'm particularly smitten with! They have gone that way, and that's the way they conduct their business. It's more of a professional approach than a business approach.

But don't try and get me to tell you there are easy answers to this. You need help out there. People need their hands held. There's no question about that. Paying a little bit for it is probably better than doing nothing and just trying to do it yourself. And the worst thing of all is not investing at all.

That is the one guarantee we have in the financial business. Well, there are actually are two. One is, if you buy the index fund you'll get the market return. Guarantee two is, if you don't invest, you will get nothing.


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