Perhaps it’s his Scottish ancestry, but Jack Bogle seems to be a big fan of Adam Smith. He often quotes the moral philosopher and pioneer of economics, and he was at it again yesterday.
Speaking in Philadelphia at the launch of the Campaign for Investors, organised by the Institute of the Fiduciary Standard, Bogle read a passage from Smith’s most famous work, Wealth of Nations, written in 1776:
Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self evident that it would be absurd to attempt to prove it. But in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.
Those words neatly encapsulate Bogle’s principal objection to the asset management industry. As the producer, its ultimate object should be to serve investors; but the interest of the consumer has been almost constantly sacrificed to that of the industry.
This warped sense of priorities is not just a problem in the United States. In the UK, for example, the head of the main asset management trade body, the Investment association, was ousted last year for encouraging member firms to sign a Statement of Principles, which included a commitment to put the interests of investors ahead of their own. At the last count, only 25 of more than 200 IA members had agreed to do so.
Thankfully, as Bogle acknowledged, positive changes are happening, though he rightly urged caution. He described the regulations recently announced by US Department of Labor to curb conflicted investment advice as only the “first step” in a long process. ”Today we’re at the beginning of an arc in finance toward fiduciary duty,” he said.
Other regulators, including the Securities Exchange Commission, Bogle added, need to get on board: “I’d like to see a federal standard of fiduciary duty. This standard should be applied to every dollar invested. Put the investor first; it’s not that complicated.”
The priority now, Bogle went on, is to insist on much greater transparency around fees. Despite huge growth in the fund industry, he pointed out, the weighted average expense ratio of mutual funds is “higher today, in 2016, than it was when I got into the business in 1951”.
For me, what Bogle is saying is a challenge not just to fund managers but to everyone involved in investing. Brokers, consultants, advisers and journalists all need to remind themselves that ultimately it’s not about the industry, but the consumer.
It’s also a challenge to investors. Remember, it’s your money. You provide the capital and you take all the risk. If there’s someone in the value chain who doesn’t have your very best interests at heart, stop paying them and take your custom elsewhere. To quote Bogle again from yesterday: “The most powerful force in all human history is the consumer’s feet.”
I can imagine Adam Smith nodding in agreement at that.
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