Bogle Made Our Lives Better

Bogle Made Our Lives Better

by Dr. Don Chambers

Much has been made recently of the role that John (Jack) Bogle played in pioneering the use of mutual funds that used passive indexation rather than active management. But I believe that his biggest legacy was in radically lowering the expense ratios of mutual funds.

In the early 1980s I co-hosted a conference on money market mutual funds involving leaders of numerous funds. At the time, money market rates were very high (due to very high rates of inflation) and money market mutual funds had become popular due to the regulation of rates (capping) that traditional financial institutions could offer. Most money market mutual funds were charging expense ratios of 1% or more. Vanguard, under the leadership of Bogle, had expense ratios at least 50% less than its rivals.

I remember asking Vanguard executives why they charged management fees so much lower than their competitors. They responded simply that it was the decision of Bogle.

In recent years Vanguard’s incredibly low expense ratios have forced competitors to cut their expense ratios on many funds (open end funds and exchange traded funds) to less than 20 or even 10 basis points per year!

Industry leaders decades ago would have claimed that such low management fees and expense ratios would be unsustainable and that it would put them out of the mutual fund business. But the companies offering the lowest fees are thriving the most. For example, Charles Schwab (who led low commission rates after their rates were deregulated) competes well against Vanguard in a spectrum of open-end funds and exchange traded funds. Yet being a pioneer of broad low-cost fund offering has not crippled Schwab’s finances. On the contrary, Schwab’s stock has soared over the last 30+ years and continues to generate very healthy profits. Most of the investment management industry is doing well despite the massive reduction in fees.

Contrast what Vanguard under Bogle accomplished for investors with how little good is being accomplished by another firm: TIAA (formerly TIAA-CREF). TIAA is a non-profit that traces its roots back to the philanthropy of Andrew Carnegie in 2018 and its mission to help teachers. This non-profit has flooded the media with expensive ads about the “greater good” and how wonderful their organization is. But truth be told they are a laggard in lowering the fees for the vast majority of their clients.

Bogle’s legacy is incredible. He did more for ordinary investors than any competitor or government official did. I think his name and face should be on our money.

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