Vanguard founder John C. Bogle blasted American Enterprise Institute Scholar Peter Wallison’s claims that market forces keep mutual fund fees in check, in an editorial published by The Wall Street Journal.
“It’s hard to imagine that Peter Wallison is serious,” worte Bogle of Wallison’s contention that directors need not be concerned with setting fees for investors. Wallison compared boards to local utility commissions. Such commissions stifle free market forces, he said. Bogle countered: “It flies in the face of common sense.”
Fund boards don’t set fees; they approve structures set by the advisors, Bogle said. Contrary to Wallison’s assertion they typically do consider the advisors’ costs, he asserted.
Bogle points to Fidelity, where the directors oversee 668 specific mutual funds. Bogle argues that Fidelity makes a handsome profit on most of those funds, while losing on a few, but the fees reflect a relatively consistent average, he said.
Los Angeles-based American Funds has held its rates at about 1% of assets under management for decades, Bogle noted. But as the firms’ assets have swelled, from $282,000 in 1958 to $70 billion today, so do its profits.
The Investment Company Act of 1940 demands that mutual funds keep the best interest of the investor at heart, he said. “Eliminating fee-monitoring authority of the fund board would belie that sound public policy,” he said.
The real way to bring competition is to put the power in the hands of shareholders, said Bogle. That means more independent directors, and independent chairman and a small staff to support them. Each of these is a proposal before the Securities and Exchange Commission.
“To step back from these reforms is to continue to empower the adviser fox to watch the mutual fund henhouse,” Bogle wrote.
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