realitybase - Journal

John C. Bogle, legendary founder of Vanguard Group, adds institutional money managers to the list of those whose failures contributed to the current financial crisis, reports Gretchen Morgenson whose NYT piece is the source of all facts and quotations below.

Professional money management firms like Fidelity, Vanguard, and Putnam today control 70 percent of the shares of large public companies, by making investment decisions on behalf of pension plans, IRAs, 401(k)s, and mutual funds. This gives them enormous potential power over board structure and governance, director elections, executive compensation, stock options proxy proposals, dividend policies, and other matters of concern to shareholders at the companies they own, but they rarely exercise any of this power. Their passivity enables managements to ignore the interests of shareholders and exploit their positions for their own gain.

But that isn't all. Despite the Investment Company Act of 1940 requirement that "mutual funds should be managed and operated in the best interests of their shareholders, rather than in the interests of advisers," money managers routinely abuse their positions of trust by exploiting investors.

Consider fees. Charges levied on mutual fund investors are much higher than those that the identical firms exact on pension clients, for example. The three largest money managers, Mr. Bogle pointed out, charged an average fee rate of 0.08 percent to pension customers. This compares with 0.61 percent charged to fund shareholders.

Money managers also haven't done the kind of due diligence that might have protected their investors from titanic losses. "How could so many highly skilled, highly paid securities analysts and researchers have failed to question the toxic-filled, leveraged balance sheets of Citigroup and other leading banks and investment banks?" Mr. Bogle asked.

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Some money management firms are publicly traded themselves, and Mr. Bogle says that those firms offer an added layer of deep and serious conflicts because executives running them try to serve two masters: their shareholders and their fund clients.

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In the face of all this, Mr. Bogle suggests that we force our agents to relearn what being a fiduciary means. A fiduciary, these managers seem to have forgotten, acts for the sole benefit and interest of another. We need to replace the agency society with a fiduciary society, he argues.