Bogle Blasts Financial Industry, Calls Compensation a ‘Disgrace’

Industry elder statesman John Bogle did not refrain from speaking his version of truth to power at a national gathering of investors, condemning the financial industry's grip on corporate America while taking other unpopular stands in a wide-ranging keynote discussion.

"The mutual fund industry owns 35% of the stock in America," Vanguard founder and the fund firm's former CEO told Morningstar's Don Phillips, in a conversation hosted by the fund research firm at its annual convention in Chicago.

"But it's actually much more than that because the big firms run institutional money as well. So it's probably 50% of stock. So we control corporate America," Bogle said, adding that such power leads to abuse.

"Executive compensation is a disgrace," he said, and the retired Vanguard CEO also criticized corporate philanthropic gifts, which he said corporations do "in their own interest," calling for shareholder approval for such pseudo-magnanimous gestures.

Bogle said that courts, regulators, security analysts and with few exceptions the news media have all failed to tame large financial industry firms and fully subject them to their shareholders.

Quoting a passage from the New Testament, Bogle said a man cannot serve two masters. And that's the attempt that takes place when a firm like Deutsche Bank, one example he named, say in effect "we love our investors but we're not going to cut their fees."

Low fees is the outspoken Vanguard founder's biggest claim to fame, and though the index giant retains that legacy, its former CEO did not refrain from criticizing Vanguard, where he still works every day.

"Can our directors be fiduciaries and understand the workings of 160 mutual funds?" he asked. "The answer is pretty obvious you can't do it all; you need some help. They need staffs," Bogle said, noting that things were different when he founded the firm in the 1970s with a staff of just 28 and only one fund the team had to know.

The Pennsylvania-based firm today has 14,000 employees, so it's impossible to know them all, but Bogle still tries, noting in passing that he went to the firm's exhibit hall both to meet the employees there.

Bogle acknowledged that the current management of Vanguard may be frustrated with his unwillingness to "shut up"—"I just like a fight," he said—but said that disagreement is just a part of life that human beings must "face with good humor and a smile."

Bogle said one mutual fund executive who got on the wrong side of former New York state attorney general Eliot Spitzer approached him at a book signing, in a book in which Bogle criticized his behavior. The former exec had done some jail time, but assured Bogle in the awkward meeting that "I was a bad apple" deserving of the punishment.

Bogle was outspoken during the Spitzer prosecutions, calling for more aggressive legal approach than the lawyers and courts pursued.

"I looked at it as a conspiracy of insiders and hedge fund managers to defraud the long term owners of the fund," he said.

He called out fund giant Putnam, two of whose former CEOs had ethical problems, he said, condemning a ruling in whch one of them paid just $25,000—a pittance for "making all that money for Marsh and McClennan," he said, referring to the inside dealing that landed the insurance giant in trouble in 2004 in a case ultimately settled out of court.

While Bogle acknowledged that fund stewardship is better today than a decade ago, he expressed dissatisfaction with its progress, a process he said should be continual. A key problem for the fund industry today, he said, was a gap of 3% between fund returns and investor returns.

"That shows the industry doing something wrong in the way it attracts investors," he said, criticizing ads showing only top-performing fund rather than the performance of all funds.

The indexing champion didn't even spare indexing, saying that, "like any good idea, it attracts marginal players, people who jump on the bandwagon." He cited an ominously named "emerging cancer" index fund that didn't make it, as an example.

And he unhesitatingly answered yes to Phillips' question as to whether he'd rather buy a low-cost actively managed fund than a higher cost passively managed fund—"since

I believe cost is the single most important factor in investing," he answered.

On a pending fund controversy, regulation of money market funds, Bogle vocally opposed the industry preference for a fixed net asset value.

"We really out to be thinking about the shareholder and the society and not having the Treasury bail us out again," noting that while the probability a bailout would be needed was small the cost to society of such a bailout would be enormous—and unfair for a "profit-making business."

He said the fund industry wants a fixed NAV for marketing reasons.

"I'm fundamentally opposed to marketing," Bogle later said in a separate meeting restricted to members of the media.

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