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Vanguard founder Bogle calls for 'fiduciary society'

The mutual fund pioneer sees current conflicts in the money management industry as responsible for massive failure of the financial system. He lays out a prescription for change.

Vanguard founder Bogle calls for 'fiduciary society'

E.F. Hutton’s not around anymore, so nobody’s listening to him. But Vanguard Group founder John C. Bogle is and he can still draw a crowd when he unleashes his moral outrage over our “bottom-line” society.

About 180 people nearly filled an auditorium at the National Constitution Center May 13 evening to hear Bogle give the seventh annual John M. Templeton Jr. lecture on economic liberties and the Constitution.

Anyone who read his op-ed piece that appeared in the Wall Street Journal April 20 got a taste of what he’d say about the societal shift from “moral absolutism to moral relativism.”

In the article, he called for the establishment of a “fiduciary society.” In his lecture, which is available on his blog here, he expanded on what that means and how and why the country needs to do that.

Bogle was also challenged on his examination of the current financial crisis and his prescription for change by Peter J. Wallison, of the American Enterprise Institute, a conservative think tank.

Two Republicans duking it out over America’s financial future may seem more like an undercard matchup than a main event.

But hometown investment hero Bogle is a luminary in investment circles for his championing of low-cost index funds and support of mutual ownership rather than corporate ownership of financial institutions.

In creating Vanguard as a mutually held organization, Bogle said he was trying to align the interests of fund investors and fund managers under the established principles of fiduciary duty. Now, he says, the federal government must act to guarantee the fiduciary rights of mutual fund shareholders and pension fund beneficiaries.

Bogle was nostalgic about America’s “ownership society” when 92 percent of all shares of corporations were held by direct stockholders, but recognizes those days are gone. Today, we have an “agency society” in which financial intermediaries hold the shares on behalf of individuals and families. In his fiduciary society, Bogle says the intermediaries still exist but the rights of investors are paramount and protected.

Here’s how he’d try to set a federal standard of fiduciary duty:

* Money managers and financial agents must act solely on behalf of their clients.

* Securities analysts and investment managers must be accountable for their appraisal of the securities that wind up in everyone’s portfolios.

* The financial intermediaries who own securities on our behalf must demand that corporate directors and managers meet their fiduciary duties to their own shareholders.

* Fund owners must be able to demand “discipline and integrity” in the mutual funds and other financial products.

* Advisory fee structures must meet a “reasonableness” standard, based not only on rates but dollar amounts.

* Money management firms must eliminate all conflicts of interest that get in the way of their sole purpose: acting for the exclusive benefit of their shareholders.

Bogle called for a national commission to figure out how best to accomplish all of that. Such changes, he said, likely would require that the federal government preempt multiple state laws, because the states have control over chartering corporations.

“Our financial hirelings didn’t protect us sheep from the wolves that created this financial crisis, either because they didn’t see them coming, or saw them and decided to flee the pastures of capitalism,” Bogle said.

Wallison, who referenced his underdog status to the audience, agreed with Bogle that self-interest is rampant in society now. But he took issue with Bogle’s prescription for change, smelling “a strong whiff of regimentation.” A complete federal overhaul would be too heavy-handed when individuals are already free to take their money elsewhere, he said.

Lapses or outright abuses of fiduciary responsibility already have a forum for redress, Wallison said: the courts.

Much of Wallison’s response centered on views he’s articulated previously that the financial crisis was spawned by U.S. government policy to foster homeownership. It worked, but with disastrous unintended consequences, he said.

Wallison likes the “live and let live” society that is America in the 21st century. For him, a massive federally directed cure in response to Bogle’s diagnosis of arrested ethics is unnecessary.

Bogle clearly sees the financial system as broken. “Today’s agency society has ill-served the public interest,” he said. “The failure of our money manager agents represents not only a failure of modern-day capitalism, but a failure of modern-day capitalists.”

If automakers weren’t crashing into bankruptcy, life insurers weren’t openly seeking federal lifelines, and bankers weren’t choking on the bad loans they’d made, perhaps Bogle’s call for change might catch the ear of a Senate Finance Committee staffer.

But even the Obama administration, which has taken on an ambitious agenda, would think twice before tackling Bogle’s fiduciary society.

Mike Armstrong Inquirer Columnist
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Mike Armstrong Inquirer Columnist
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