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Fiduciary Advice

Bogle on the Importance of a Fiduciary Duty for Money Managers

Jack Bogle describes his strongly held views on fiduciary duty. In his words: “If you touch another person’s money, you [should be] a fiduciary.”

Articles by Jon

By Jon Stein
CEO & Founder, Betterment  |  Published: February 15, 2019

The article below offers an annotated, abbreviated part of a conversation between Jon Stein and Jack Bogle in 2016. The words are their own as individuals, and they don’t reflect the views of Betterment. If major sections have been removed, we’ve done so for readability or because a claim was made that’s out of date or unsubstantiated.

Jon Stein: I think things are changing pretty rapidly. I think parts of the financial world are going away. You wouldn’t start a business in trading today. Nobody would do that, because there’s no long-term competitive advantage there. There’s probably little value for the customer there. So I can’t imagine people doing that.

Jack Bogle: I can! On that point, have to say that I am in awe and wonderment of Morgan Stanley placing their big bet on wealth management. And the reality, the simple dollars and cents mathematical reality is the less wealth management we have, the wealthier we are. So why do you bet the firm on wealth management? And I was amused in a similar way, reading a Morningstar document over the weekend. Someone at Morningstar has figured out–I don’t know how, but they have an article out about it that the implementation of fiduciary duty as standard will cost the financial system $2.4 billion a year. I don’t know what the number is. I’m going to guess that’s low. But doesn’t that mean–as I wrote back to them–doesn’t that mean it will save investors $2.4 billion a year?

Jon Stein: Right.

Jack Bogle: As you can see, I am irrepressible.

Jon Stein: Well, you’ve spoken about the DOL proposal, I believe, in the past. We’re certainly big supporters of it. What do you think of it?

Jack Bogle: Well, I have to be a little careful, because I get in trouble here, periodically, if Vanguard management thinks I’m contradicting their stated position. And I have no interest in contradicting management. I have no interest in taking the other side of things. But I have this terrible problem where I have to say what I think is true. And I think the truth here is two things.

One, the fiduciary standard must happen. Two, when they get probably 100 lawyers trying to write a provision of a fiduciary standard for the investment business, you’re likely to get a lot of things that don’t need to be there.

Jon Stein: That’s probably right.

Jack Bogle: So I perceive that the industry can come to grips, if we had some good spokesmen down there to sit down with the lawyers and reason this through together.

I don’t think those things need to be mutually opposed. I think a fiduciary duty standard with reasonable provisions should happen, and I happen to believe that the standard is more important than the provisions.

If we say, “Here’s the fiduciary standard. Figure it out, guys,” I would be perfectly happy. The foot would be in the door. And it’s better than a weak standard.

And I think that’s what’s going to develop.

Imagine a fiduciary standard being politically charged. Some in Congress want to (I guess) almost dismember the labor department for bringing it up. The SEC is very slow in giving the same support for what the Department of Labor does, for retirement plans, to what all managers and brokers should do for non-retirement plans. The SEC has been close to silent on this, and they need to step up to the plate.

And the legislators that seem to oppose this just better simmer down. They don’t understand the importance of it.

I also observed, by the way, thinking about Morningstar, this cost-benefit analysis decided a lot of cases at the appeals court in Washington. And it basically is, I think, an illusion, the cost benefit analysis. Because costs can be analyzed to the last penny, and there’s no way to acknowledge or to quantify the benefits of a fiduciary standard. How would you do that? I don’t know anybody who could do it, even me, and I play a lot of numbers games.

Jon Stein: But financial services could be driven by a fiduciary standard, in the future I think. You can have a different type of relationship with financial services than most people do today.

Jack Bogle: All it needs is to put the customer first, or put the client first, or put the investor first. And it should have, by the way – and not to expand too much – when the SEC gets into it, I hope that it will apply to money managers, who are completely exempt from what the labor department is doing.

Money managers like Fidelity, or Vanguard, or anybody else. I’d say anybody that—here’s my public statement: “If you touch another person’s money, you are a fiduciary. Custodian is a fiduciary. Distributor is a fiduciary.” And the implications of that are wide-ranging. And it will lead to much less market activity.

Of course, there’s a question about whether that will make price discovery easier. And I don’t know about all these things. But if the turnover in the markets went from 300 percent to 30 percent, which would be pretty big, they’d be exactly where they were when I came into this industry, in 1951. And we survived just fine.

It must be obvious that when somebody buys, somebody else is selling. And when somebody sells, somebody else is buying. And it’s only one person, therefore, that can be rewarded, and that’s the man in the middle. And that’s got to change, when you have a nation building its retirement plans of individuals and basically, primarily only individuals being retirement plans on the basis of a lifetime – because a percentage point or two percentage points over a lifetime is just priceless.

Jack and Jon’s conversion continues in a rich discussion on that very topic: Retirement. You can see the rest of the conversation excerpts and Jon’s tribute to the titan of Vanguard here.

Contributing Authors

Jamie Cartwright
Content Marketing Manager, Betterment

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