Jack Bogle, founder of The Vanguard Group, openly admits that the entire retirement industry has been rigged against its customers.
Bogle has been criticizing the retirement industry for years; more recently in interviews with Frontline and PBS. His message is clear: up to 70% of retiree’s market returns eventually go into the pockets of Wall St.
And the sad thing is that there’s nothing anyone can do about it, because it’s perfectly legal.
“When I joined this business, it was a profession with elements of a business. Today the mutual fund industry is a business with elements of a profession, and too few elements at that.”
When asked whether he meant that the industry serves its own interest before its customers, Bogle confirmed:
“Exactly so. Business has an obvious reason for existence — to earn a profit…It doesn’t take a genius to know that the bigger the profit of the management company, the smaller the profit that investors get because they’re both based on gathering assets and raising fees.”
Bogle founded the Vanguard Group in 1974. They began with one fund, cultivating it for a period of time, and for good reason: Bogle believed that focusing on one fund made you accountable. And for Bogle, accountability meant that the customers’ success depended wholly on the fund’s performance:
“It was a fund that we wanted to take good care of, and we knew what it was doing every minute of every day.”
A simple and ethical model driven by market performance, that all changed when the retirement industry realized that greater profit potential lay in focusing less on the markets, and more on creating products to generate fees.
“Then all of a sudden, instead of one fund that we’re looking after as trustees, we’re in the marketing business. So now the big firms, including Vanguard, have 150, 250, 350 different funds under one management. People can’t possibly know; the directors can’t know; the management can’t know. You can’t track 300 funds or 200 funds. It’s a marketing business.”
So according to Bogle, the retirement industry is no longer about making money through increasing investors’ wealth. It’s about churning out more products to generate fees! In other words, it’s about using the legal structure of transactional costs to fleece investors.
Think about this:
- The typical management fee is about 2%.
- Management fees will vary depending on type and number of funds you are invested in.
- Managers collect fees whether or not your funds are performing well.
- You will not know what the state of the market (or even the state of the inflation) will be when you start pulling out your money.
So if you invested, say, $100,000 into your retirement, depending on all of the above, you can reasonably end up with only $30,000 or $40,000 in the end, should the market tide turn against you.
But your money manager, who is more or less immune to market exposures and immune to bad performance, will have made money off your funds with almost zero risk!
That’s the harsh reality of management fees: you take all of the risks while your money manager, whose risk exposure is close to zero, will make off with most of the profits!
But don’t just take our opinion on the matter. Warren Buffett agrees with this scenario. He’s mentioned on several occasions that the only way to make money over time is to invest “without paying fees to a mutual fund manager.”
Jack Bogle would concur, despite being a pioneer in the mutual fund industry:
“Management cannot add value, but people somehow feel more comfortable with management looking over their investments.”
So if your money manager can’t “add value” to your retirement, then he or she can only subtract value from your investment.
But let’s take a closer look at this statement. Why can’t your money manager add value? Sadly, your manager is serving two masters: you and the fund’s stakeholders. And between the two, the investor typically gets shafted.
“So the more assets you have, the more fees you get. And when you could cut them back to help the fund shareholder, you’re faced with this no-man-can-serve-two-masters dilemma.”
And then, there’s the self-interest of the money manager–an ethical dilemma:
“So the money managers always want more, and that’s natural enough in most businesses, but it’s not right for this business.”
So if your retirement funds are mainly comprised of mutual funds, bear in mind that a market downturn is not the only thing you need to worry about.
You need to think about all of your hidden losses in the form of fees.
Of course, if you simply held a good amount of gold, you wouldn’t have to worry about excessive fees or market downturns.