John Bogle, the founder of the Vanguard Group, is one of the grand old men of the mutual fund industry, so when he speaks, as he did last week at the annual Morningstar Investment Conference, people pay attention. As beaten-down and battered as mutual funds have been, of course what everyone wanted to know was how the industry was ever going to recover. Bogle's prescription: Tougher ethical standards.
"There are some things that one just didn't do," Bogle said. "That's the way I was brought up. It was black and white. Now, ethical standards seem to be 'if everybody else is doing it, I can too.'" He was talking about the way the fund industry, and too many other investment professionals, have been selling dubious subprime mortgages and derivatives so confusing even Wall Street's rocket scientists didn't fully understand them.
Bogle also blamed the hectic trading pace of some professionals for slicing off ever more of investors' money to Wall Street. He noted that a buy-and-hold investor will keep nearly 100 percent of his or her earnings, as opposed to a more active trader who ends up paying fees constantly.
I would add that ethical behavior itself is a long-term strategy. Poor ethics will always, sooner or later, catch up with you. Shady operators can cut corners to try to make a few extra bucks, but if you are in this for the long haul, as I am and my clients are, there is no substitute for honest aboveboard behavior.
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