Vanguard Group founder John Bogle was an advocate for a fiduciary standard long before anyone in the industry even knew what it meant. Indeed, he mentioned “fiduciary duty” in his now-famous 1951 senior thesis at Princeton University. Fast forward 20 years, to 1971, when he spoke to the executives of Wellington Management Co., then a public company that would eventually become Vanguard. In those remarks, he had a section titled “The Challenge of Fiduciary Duty” where he said: “We live in a world that is increasingly intolerant, not only of conflicts of interest, but even the appearance of conflicts.”
That was 45 years ago. Only today are regulators—and the industry—beginning to recognize the wisdom of those words. Unfortunately for several large plan sponsors (and even a few small ones), they had to learn the lesson of such fiduciary accountability in court. Ironically, the lack of regulatory backbone protected the very service providers that exposed these plan sponsors to this liability.
The attention now being paid to various forms of self-dealing by financial service providers “will ultimately require this industry to change and change rapidly,” Bogle told me when we met in Philadelphia at the Fiduciary Institute’s recent launch of its “Campaign for Investors” initiative. We had a good chat, and Bogle agreed to sit later for an interview. (That interview was published June 21 in the national trade journal FiduciaryNews.com.)
The U.S. Department of Labor’s recently issued final rule on conflicts of interest—aka the “fiduciary rule”—begins to address the issue, but it applies only to retirement plans (including IRAs). Bogle sees this split regulatory environment as logistically impossible. He wonders if it’s even possible for stockbrokers to treat the retirement assets of a client differently than that same client’s non-retirement assets. “It’s just absurd to think your broker is going to handle your retirement account for you in a little red file and your personal account in a file that says, ‘Rip this guy off whenever you can.’” Yet, until the Securities and Exchange Commission updates its own guidelines to bring them in harmony with the Department of Labor’s rules, this situation remains legally possible.
As we talked about this, Bogle alluded to what may be one of his greatest concerns about the company he founded. “I tried to make Vanguard a great fiduciary business, but it’s a marketing business,” he said. “That involves bringing out many new funds—that you would never bring out as a fiduciary—because everybody seems to want them, and charging as much as you can to have the resources to bring out the next one and the next one.”
If even a stalwart firm like Vanguard can’t stay away from conflicts of interest (in the past I’ve written about a revenue-sharing-based 401(k) product Vanguard rolled out a few years ago), what’s to stop other fund companies? Bogle admits the public may be less aware of the fiduciary standard than they should be—“consumers … have so many things on their mind,” he said. Still, he believes, sooner or later retail investors will experience first-hand the results of ignoring conflicts of interest. (Retirement plan sponsors have already seen this happen in their peer group with the aforementioned court cases.)
So, according to Bogle, it doesn’t matter if investors aren’t following the latest regulatory escapades in Washington because “investor experience is going to be more important than the knowledge that there’s a change in the weather in terms of the fiduciary standard.”
In the end, Bogle says of financial service providers, “if your clients leave you, unless you conform, you’re not going to be in business very long.” In other words, informed, engaged and active consumers will ultimately correct the system. That, in a nutshell, is the essence of a free market. It’s appropriate, then, to leave you with one of Bogle’s favorite Adam Smith quotes: “The interest of the investor must be the ultimate end and object of the entire financial system.”
Christopher Carosa, CTFA, a Mendon-based author and publisher, runs a boutique investment adviser that offers fiduciary consulting and employee education workshops to 401(k) plan sponsors. He recently interviewed John Bogle and his articles have appeared in national publications.
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