RENEE MONTAGNE, host:
John C. Bogle is a financial maverick. More than 30 years ago, he founded the investment group Vanguard, which pioneered low-cost index mutual funds for the individual investor. Now retired as CEO of Vanguard, Jack Bogle is out with a shot across the bow, a book called "The Battle for the Soul of Capitalism: How the Financial System Undermined Social Ideals, Damaged Trust in the Markets, Robbed Investors of Trillions and What to Do About It."
And good morning to you.
Mr. JOHN C. BOGLE (Author, "The Battle for the Soul of Capitalism"): Good morning, Renee.
MONTAGNE: Let us start with that title, "The Battle for the Soul of Capitalism." As you see it, part of the problem is the power shift from the individual investors to those who handle the money, I mean, the middlemen, if you sill, brokers, mutual fund, pension fund managers, all the way to massive financial institutions. Talk to us about that.
Mr. BOGLE: Yeah. It actually goes even beyond the financial institutions and the mutual funds to corporate America itself. And what I try and describe in the book is what I call a pathological mutation from a terrific system of capitalism, which I call owners' capitalism, where the rewards went to those who took the risks and put up the capital. That system has mutated into a system where it's managers' capitalism now, where the managers are taking an untoward share of the rewards created by our corporations and our mutual funds and other financial institutions, to themselves, so the investor is the low man on the food chain.
MONTAGNE: What was the turning point, as you see it?
Mr. BOGLE: Capitalism began as a system trusting and being trusted. That's the way people worked in those days, and what happened is, over the last roughly 25 years, managers started to take over, and the managers took over because they were representing owners that are no longer in the driver's seat. Ninety-one percent of stock 50 years ago was held by individuals; now it's down to just 38 percent.
MONTAGNE: Except for one thing. Fifty years ago, could you say that those individuals who held stocks were sophisticated investors, or at least to some degree sophisticated investors, and they knew what they were doing? Now half of all households have investments in mutual funds. Could we go back to the old system?
Mr. BOGLE: No, we could not, and that's a very, very important point, and that is, what's emerged from this financial system is the one thing that everybody knows: Diversify, diversify, diversify. The way you do it in an index fund, you own all of corporate America in one holding, and you can't do that yourself. The ownership society that I talked about is gone. We need a new kind of society where the people that are running the money, or Mr. and Mrs. Household America, are putting the interests of the investors first rather than their own interests first.
MONTAGNE: Why aren't they serving the interests of the individuals?
Mr. BOGLE: Well, the mutual fund side is kind of the poster child for how badly this system has gone awry and that is that the mutual fund managers, with heavy management fees, heavy portfolio turnover costs, heavy sales charges, they are taking roughly 2 1/2 to 3 percent out of the return that the stock market delivers. So think about it this way: Over an investment lifetime, if the stock market, say, were to earn 8 percent, a thousand dollars invested at the beginning of that lifetime would grow to around $130,000, a staggering return. But if it grows at 5 1/2 percent, that is to say, the 8 percent market return less the 2 1/2 percent the intermediaries take, that thousand dollars would be worth, very roughly, $30,000. You're paying $100,000 of your money to the financial system on a compounded basis. It's not right for the investor.
MONTAGNE: So what is your solution for wrenching power back from the large financial institutions and brokerage houses, putting it back into the hands of individual investors, especially when you say, in a way, that can't be done, we cannot turn the clock back?
Mr. BOGLE: I believe we need a federal statute of fiduciary duty, requiring the man in the middle, the croupier at the table, these pension plan trustees, to act as trustees for the investors they're serving rather than individual entrepreneurs.
MONTAGNE: But may I ask, when you suggest more federal regulation, I mean, aren't you a lifelong Republican?
Mr. BOGLE: Well, I am a life...
MONTAGNE: And a capitalist?
Mr. BOGLE: I'm a capitalist and I'm a Republican. I'm not asking for federal regulation of, you know, the minutiae of business, which we get into far too much. I don't believe in that. I'm saying let the federal government establish some good rules on the behavior of how trustees are supposed to perform, and that's what we need to bring this system back to where it ought to be. That's how we return capitalism to the soul that it once had.
MONTAGNE: John C. Bogle is author of "The Battle for the Soul of Capitalism."
Thanks again for joining us.
Mr. BOGLE: Thank you.
MONTAGNE: This is MORNING EDITION from NPR News. I'm Renee Montagne.
STEVE INSKEEP (Host): And I'm Steve Inskeep.
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