Vanguard's Jack Bogle: Financial 'train wreck' looms

— -- John Bogle is the founder of the Vanguard Group, one of the nation's largest mutual fund complexes. He created the Vanguard 500 Index fund, the first fund that jettisons the fund manager and tracks a stock index — a low-cost, tax-efficient way to invest that has been embraced by institutions and individuals alike.

An outspoken critic of the mutual fund industry, Bogle has written several no-nonsense books about how to invest, including Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor (1999) and Bogle on Mutual funds: New Perspectives for the Intelligent Investor (1993). His latest book, The Clash of the Cultures: Investment vs. Speculation, came out in August. In this interview, Bogle shares his views on exchange-traded funds, fiduciary standards, indexing and money market mutual funds.

Q. Speaking of speculation, have exchange-traded funds gotten out of hand?

It's absolute speculation, and it's hurt a lot of people. Vanguard ETFs have the same fees as regular index funds, and they're cheaper than anyone else's. People say if you own the S&P 500 index in the ETF form and never trade it, how can you object to it? But the temptation is there.

Q. How much more likely are you to trade ETFs?

A. Vanguard did exhaustive study on ETF use and ignored that point. You're probably 25% more likely to trade with an ETF. It's not day and night, but the trend exists. And these are the Vanguard experiences; others are certainly worse.

Q. Do investment advisers trade as much as individual investors?

What advisers have to do is respond to events. Activity is something investors expect. I was talking about buy and hold to some investment advisers, and one said, "I tell my investors to do this, and the next year, they ask what they should do, and I say, do nothing, and the third year, I say do nothing. The investor says, 'Every year, you tell me to do nothing. What do I need you for?'" And I told them, "You need me to keep you from doing anything."

Q. You've long urged that brokers be put under fiduciary standards. Have you heard a convincing argument against it?

I think it's less of posing an argument against it than it is saying that the brokerage industry thinks it's better off under FINRA standards, which is the suitability suitability standard. At a brokerage firm, a broker has to sell investments, and all he has to do is prove the investment is suitable. But if your job is to manage people's money, the fiduciary duty is so clear, so obvious.