Bogle: Fiduciary Standard Clearly Right Thing to Do

Christine Benz: Another topic that I know you have thoughts on is this idea of a uniform fiduciary standard. The Department of Labor has floated a proposal. Let's get your thoughts on that specific proposal and the idea of a fiduciary standard. I know that you think it's a good idea in general.

Jack Bogle: I've been struggling to get a federal standard of fiduciary duty for, I guess, 25 years, and I have advanced the ball maybe an inch or half an inch. But the White House staff called me in the fall of last year, and I worked with the White House staff and the Department of Labor staff quite a bit since then on trying to develop the ideas for this, trying to give them confidence that it was the right thing to do. Also, I've had a couple of really nice conversations with Secretary of Labor Thomas Perez. It's the right thing to do for the retirement-plan area--that's all that's involved here. Obviously, I told them at the beginning that they really ought to not stop at retirement plans. Everybody offering investment advice ought to be a fiduciary, whether it's through retirement plans or not. I think it's so clear that that's the world we should have.

And I should add that--for reasons lost to history and probably on some lobbyist's memo pad--there's a section in the Dodd-Frank Law that basically gives the SEC (rather than the Department of Labor) the power to look into the issues of fiduciary duty with respect to people offering advice to individuals, and it leaves out the entire institutional-investment money-management industry.

Aren't we fiduciaries? Aren't mutual fund directors fiduciaries? Don't they have some kind of an obligation to the shareholders they represent, particularly the independent directors? That is a real mess because, as I said before, mutual fund managers need a federal standard of fiduciary duty. I had this conversation with the management of the Investment Company Institute two or three years back. And they said, "Look, Jack--we're already fiduciaries. Why do we need a law for that?" And I asked the killer question: "Your management company in this business has its own set of shareholders, and it runs a fund with its own set of shareholders. The management company's shareholders are often public shareholders or shareholders of giant financial conglomerates. So, to whom do you have the fiduciary duty?" I tried to think of a good phrase for this, so I looked it up in the Bible: "No man can serve two masters."

So, it looks to me like the SEC will, in fact, get on board. I was down there at their celebration of the 75th anniversary of the Investment Company Act of 1940, and many of the commissioners said the SEC should be in the business of developing this fiduciary-duty standard as well. I don't think it's going to happen, to be honest, in my lifetime, but we will get a fiduciary standard, and you will remember me, Christine.

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Benz: I'll remember you either way!

Bogle: Or so he promised. (Laughs.)

Benz: One piece of pushback that we've heard in relation to this Department of Labor proposal is that it's going to somehow cheat smaller investors out of obtaining advice. What's your assessment of that assertion?

Bogle: Well, first, I don't really get it. I've see it in the Capital Group submission. I've seen it in a number of other submissions. There are thousands of pages involved, and I just can't possibly read them all. I've got other things to do besides the DOL issue. But I think it's unacceptably silly. Look at it this way: If it means they can't put people in retirement plans that have sales charges, you're saying that the only way we can get you a good retirement plan is to give you a fund that will give you a poor retirement plan. The costs are a big part of this--you know this. And if you do a compounding equation over somebody's 50- or 70-year time horizon, [those costs take a big bite]. For young people out there today, they'll probably live to 100; for someone in their 20s, that's an 80-year time horizon--that's amazing. A little addition to cost just defeats the whole principle of the program.

So, they're either saying that we can't afford to do it or the law will prevent us from doing it. I don't think the law needs to be drawn so that you can't have some flexibility about the price of what you offer. I'm a person who says, "Put them all in index funds." And I believe that that is the absolute correct thing to do for a very simple reason, and that reason is all of those retirement-plan assets--in 401(k)s and IRAs outside of the index fund--are invested in the total stock market. You've got tens of millions of people investing. You've got twenties of trillions of dollars invested in those plans. They will have the stock market return minus 2%--all of them as a group. There's just no way around that. And that's a high penalty. It's too high of a penalty. It simply arrogates too much of the returns of the stock market to the marketing system.

So, it's not easy. You can't enforce a fiduciary duty, I don't think. The proposed regulation can be simplified. It could be more principles-based--and probably should be. My idea is really a simple one: Let's get a standard of fiduciary duty for retirement plans on the books. If we have to give a little bit here and there, that's life. But we'll have it, and then we can work for five or 10 years or longer to make it better and better and better. And we can work for five or 10 years or longer to expand it to nonretirement plans and to all institutional money managers. That's the ideal sequence.

But Washington--and I'm glad you're sitting down for this one--Washington is not a good place to get anything done. And anything of this nature is so far down the list of things that need to be done. It's very important to American families, but it's a subtle and it's long term. It doesn't have a quick answer like somebody's 30-30-30 plan from a few years ago--or whatever it was. You just have to be aware that things can be simplified too far. It's complex. People are divided. But retirement-plan investors--and, ultimately, all investors in their investing--need to have some assurance that their broker is putting their interests first, rather than putting his own interests first. And that's what a fiduciary is and does. As I said in the talk I gave to the CFA Society here in June, if you don't like the idea of putting the client first, then you're falling back on a proposition and saying, "We put ourselves first, but it's close."

Benz: A related question is whether there should be some educational standards in place for people proffering financial advice to accompany the fiduciary standard. Would you support a move to put in place some uniform educational requirements for advisors?

Bogle: Well, I guess my answer is going to be a little wishy-washy. I'd surely put it in place for most. But where does that get you? I think we try to create uniformity where there is diversity--particularly in the legal area--without taking into account that there are so many different lifestyles, so many different investment styles. Someone who comes into the business having sold, with all due respect, vacuum cleaners is different from somebody coming into the business with an MBA or a Master's Degree in finance. So, in the abstract, it's a good idea. But the reality is--and this is a philosophy you develop when you age a little bit--it's not so much what you do but how it's implemented.

So, the principle is good; but the implementation, as with everything in life, is tough. Working in that direction, maybe having some simple instruction or maybe some qualification test is fine. But I kind of get nervous about the idea of requiring a CFP or something of that nature. Although if you're going to go through the CFA, you really know what's going on. That's a hard, rigorous, three-level exam, which I think less than half of the people can get through. But when you get to some of the other designations, I'm not sure that that should be a requirement.