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The outspoken sage is outraged that his old company sells funds with 'Wonder Bread' sales tactics while holding itself out as the low-cost choice
June 14, 2013 — 5:25 PM UTC by Lisa Shidler
Brooke’s Note: I love John Bogle, especially after reading this article. That doesn’t mean I think he’s right. In fact, I very much hope he’s wrong. He stood in front of a mutual fund crowd and blasted away at the idea of spending the big bucks to market those products — singling out Vanguard Group for perhaps his greatest wrath. (My sense is that he feels that the Malvern, Pa. fund giant deserves the special place in his doghouse reserved for hypocrites and people who meddled with his creation.) At RIABiz, we depend on the marketing dollars of several mutual fund companies, so we have mixed emotions on that point. But we have clarity about the fact that we like people who fully speak their mind, gracefully and impoliticly, if you will. Two sources we respect deeply, Pat Allen and Burton Greenwald, have leapt to Vanguard’s defense in this article. The story’s balance is there, except with regard to our favorable bias toward ornery old sages.
John Bogle blasted the company he helped build — The Vanguard Group Inc. — for becoming a marketing machine, arguing that when marketing becomes a spending priority that nothing good comes of it.
Yet the industry patrician made his point in a way that did not come across as self-righteous with some self-deprecation.
“Every time I did something for marketing reasons, it was going to be on the long list of things I shouldn’t have done. I’ve done too many things for marketing reasons,” Bogle said Thursday speaking at Chicago’s McCormick Place at the annual Morningstar Inc. conference.
Bogle, who co-founded Vanguard and is seen as an industry icon, also didn’t back away from his views, which triggered controversy on the recent Public Broadcasting Service special about the retirement crisis. People felt he was too hard on the fund and 401(k) industries and too easy on consumers and plan sponsors. See: Why the industry needs to accept some blame for 'flaws’ in PBS Frontline’s 'Retirement Gamble’.
Though his remarks followed a familiar pattern with other speeches and interviews he does around the country, his words carried an additional oomph for being delivered to an audience chock full of mutual fund marketers and the advisors who eagerly purchase their products. See: Eavesdropping on the Tiburon CEO Summit: A cross-advisory channel power crowd converges on Wall Street Ritz-Carlton.
Among the ducks in his shooting gallery were: executive compensation, political donations and decisions mutual fund managers make that aren’t geared toward shareholders — such as spending for expensive advertising that says you watch every penny on behalf of investors.
Adding wattage to Bogle’s electrical storm was a very game Don Phillips, a Morningstar, Inc. managing director, who seemed to revel in asking Bogle the hard questions and putting him on the spot about his well-publicized disputes with Vanguard. “To what degree does it pain you to be estranged from current present management?” Phillips asked Bogle point blank. See: Jack Bogle steps aside as senior standards chairman at Advizent.
Bogle replied: “They have a problem. Here’s this old guy who keeps saying what he thinks. Would he just shut the …” and Bogle coyly trailed off.
It’s not me, it’s you
Bogle also joked about his dispute with Vanguard, saying: “People say to me, 'I understand you disagree with Vanguard.’ Absolutely not. I’d never do that. Vanguard disagrees with me. I’ve been in this position for too long and I’m too old to speak vigorously in a position I don’t believe fundamentally about. It gets me in trouble. I never know what Vanguard’s position is in these things. I think it’s important to have someone like me around for this business. You have to stand for what you stand for.”
Emily White, a spokeswoman with Vanguard, says that one of her company’s positions is that Bogle left Vanguard in 1996 and no longer speaks for the company.
“He’s very influential in the industry and [since he left] we’ve grown significantly and we’ve invested more in things like technology, ad development and marketing. It’s a very measured approach as with everything we do.”
White also maintained that shareholders are always the company’s priority when making decisions. “Our shareholders are the crux of everything we do. We hold that to the highest standard.” See: Three RIA citizen journalists file dispatches from the TD Ameritrade conference.
Of course, not everyone is clear whether shareholder interest and investor interest are one and the same when it comes to Vanguard.
Marketing only leads to trouble
One of Bogle’s chief beefs with Vanguard is the company’s aggressive marketing efforts. He spoke more about the problems with marketing in financial firms later in a press conference.
“I’m fundamentally opposed to marketing in a financial business,” Bogle said in the press conference. “The way I look at it — you should define marketing. What do people want? It’s fine if you are selling a product like Wonder Bread, but I never looked at Vanguard as a product-seller. I don’t like the idea of here’s a product, and let’s make another product. Products are fine and marketing is fine, but I think we should be offering products that you can buy and hold your whole life. How many funds can you hold for a lifetime?” See: The marketing naughty and nice list.
Times they are a changing
Burt Greenwald, a Philadelphia-based fund consultant who has known Bogle for many years, thinks Vanguard didn’t have a choice but to respond to heightened use of intermediaries in recent years by getting into the marketing game more vigorously.
“The overall distribution equation has changed so dramatically in the mutual fund industry since the time that Jack Bogle was an operating executive,” he says. He points out that chief executives following Bogle have recognized the changes in the industry and have responded with more-aggressive marketing plans.
“The fundamental approach has changed,” Greenwald says. “You can’t go direct, at least not effectively, and Bogle has always been critical of intermediaries.”
Greenwald says there’s no question that Bogle and current Vanguard executives have the best intentions. “I don’t want to criticize Bogle and I don’t want to criticize Vanguard. I think what Vanguard is doing is a reflection of major changes that have occurred over the last 10 to 15 years.”
Pat Allen, principal of Rock the Boat Marketing, who attended the Morningstar conference, believes marketing has evolved since Bogle was building Vanguard years ago. “Today marketers understand that the best, long-term approach is to align with customers and what’s in their best interests,” she says.
She points out that Bogle is certainly an industry icon, but that marketing is often an easy punching bag. “People like to deride marketing as a catch-all for something aggressively promotional and something that people want to run the other way, screaming from,” she says. “The way I think of marketing is in more contemporary terms, which is in its role of leading engagement with customers, of bringing them closer.”
Breaking up hard to do
Bogle spoke about his early days creating Vanguard with fondness. “This is a company filled with a remarkable story of luck, chance, fights, battles and every one of them I enjoyed. I didn’t enjoy them. I loved them. I love a good fight.”
He concedes that some in the industry may think it’s time for him to get out of the ring and stop sparring with the industry, but he’s not planning to do that anytime soon.
“Sometimes, the creator gets lost in the shuffle in other people’s egos. And, it’s OK. That’s life. There’s no way to change it. You just have good humor and smile and accept that things have changed. I still feel very good about what we created at Vanguard.”
Blows at mutual fund industry
On a roll, Bogle hit the retirement industry in the United States hard, too.
“The retirement system in the U.S. is facing three train wrecks, all of which have to be fixed,” he says. “You’ve got to do something before it gets here.”
He spoke about the constant underfunding of Social Security and maintains that it could be fixed pretty easily if the politics could be pushed aside. “Simple things end up being completely controversial,” he says. “You become a little cynical when you’re in the business as long as I am. The reality is there’s a fair way to adjust the cost of living. I could solve this problem in five minutes if you could take the politics out of it.”
Defined-contribution plans, which he pointed out began as thrift savings plans, are also a giant problem. “We’ve taken a thrift plan and turned it into a retirement plan. To make it a real retirement plan, you’ve got to do things.” See: Blog battle: Vanguard 401(k) principal and president of 401(k)-tracker have it out over the Internet.
Bogle criticized the government for continuing to let participants withdraw from these accounts and ultimately hurt their long-term retirement savings. He says rules need to be better defined to prevent that.
People don’t count Social Security as an asset
The industry as a whole forgets how important Social Security is as an asset to clients, Bogle observed. For instance, he says, when investors are reviewing their portfolios, they don’t factor in the ever-important Social Security income payments. By adding in Social Security income, he maintains that investors may have more flexibility with their retirement accounts.
“For about 90% to 95% of investors, their retirement account is not their entire asset base if they counted on Social Security,” Bogle says. “Social security is another asset base.”
Focus on stream of income
Bogle maintains that investors and advisors need to stop focusing so much on an account’s value and focus more on the stream of income.
“You need to look at the stream of income,” he says. “If Social Security pays you $25,000, then you need to look at the other side of income to produce your income. As long as checks come, you shouldn’t care how big or little the account is, as long as the checks keep coming.”
Bogle continued: “You have to focus on dividend checks, and social security checks will also continue to grow,” he said. “As long as you go to the mailbox and you continue to pull out the fund envelope and the government envelope, that’s all that should matter to you in retirement. I think we’ve got to change the mental attitude and not give away so much to money managers who have trouble earning it.”
Advisor Cathy Curtis of Curtis Financial Planning was at the conference, and she agrees with Bogle’s opinion about helping retirees allocate part of their portfolio to dividend-paying stocks. See: What three highly wired financial advisors have to teach us about social media.
“The yield, plus potential for price appreciation, are perfect for a retiree investor profile,” says Curtis. “Yes, there will be volatility, but there can be in bonds as well, as seen in the last couple of weeks. Simple truth is, the longer we live, the more money we will need,” she says. “And we’re all living longer. Investing too conservatively in retirement isn’t a good strategy unless, of course, one is lucky enough to have enough saved where taking risk isn’t necessary.”
Bogle also spoke about how he feels the money market fund system needs to be overhauled.
“The probability of something bad happening in the market is tiny, but the consequences are very dire. I think we still must act. I’ve had a lover’s quarrel with the fund industry for the last 65 years. They don’t want to get down to the truth. I don’t think we should compromise.”
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