fiduciary Archives - Chicago Global

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January 30, 20200

This piece collects tributes reflecting on Jack Bogle’s contribution to the financial services industry over his long and illustrious career. As the world markets fluctuate and fund managers fight to gather assets, it is worth reflecting on the state of the fund management industry now, which was largely disrupted by Jack Bogle.

Excerpts and quotes are from (1) Rob Arnott from Research Affiliates, (2) Ted Aronson from AJO, (3) Cliff Asness from AQR, (4) Tamar Frankel from Boston Univeristy, (5) Robert Huebscher from Adviser Perspectives, (6) Burton Malkiel from Princeton University, (7) Don Phillips from Morningstar, and finally (8) our very own Larry Siegle from the Chicago Global Advisory Board and CFA research institute.

Originally from an Adviser Perspectives piece (see attached PDF below) on January 30, 2019 collated by Ted Aronson, Larry Siegel, and Robert Huebscher.

Has anyone in the past century disrupted the world of investing (and perhaps finance more broadly) more than Jack Bogle? I think not. Sure, Bill Sharpe, Harry Markowitz, John Burr Williams, Warren Buffett and his mentor Ben Graham, have all had lasting impact. But, Jack begat the retail index fund industry, asset management through a mutual company owned by its customers, fee wars (he was hardly the first to play that game, but he played it with gusto), and the list goes on. Even though he was a vocal critic of ETFs, and of our own idea of the Fundamental Index, neither would likely exist today without the astonishing prior successes of cap-weighted indexing.

He was inspiration for my decision to launch Research Affiliates; a few months before launching the company, I had dinner with him to pick his brain. He started the Vanguard Group at age 46; I started Research Affiliates at age 47. He urged me to proceed, with the counsel: “Until you try it, you cannot know how much fun you’ll have!” Sure, we differed on smart beta and fundamental indexing. But, it was always with mutual fondness and respect. He was a curmudgeon and an occasional scold, whom we could all love for his pithy insights and for his demand that we all look to “do the right thing.” He truly put clients first. Obviously, he became rich. But, he did well by doing good – far too rare in the world of finance. His customers benefited from his efforts scores of times more than he did. He was one of my heroes. I will miss him very much.

From Rob Arnott, chairman, Research Affiliates, Newport Beach, CA

I was a FOJ – friend of Jack! – for well over 40 years. I adored the man – his wit, charm, intelligence, energy, drive, generosity (time and treasure), books and articles. Jack will be remembered for the above, for decades to come. But what will be remembered for the rest of time is what he did for global securities markets. Jack democratized capital market returns

Ted Aronson, founder and CEO, AJO, Philadelphia, PA

Though we knew it was imminent, the day we lost Jack, nevertheless, still felt shocking. While perhaps unlikely, given our age and investing style differences (everyone knows an indexer and a quant active manager can’t be friends, right?) we had become quite close over the years. He was such a force for good, and had such vitality, it’s difficult to imagine the world without him. He was one of the last heroes and one of the last old school gentlemen. And up to the very last he was working! He was writing his business memoir (and a history of Vanguard) and commenting widely and, of course, honestly and bravely, on the burning investing issues of the day. Put simply, no single person has ever done more for investors while asking less for himself. Nobody comes within a mile. We won’t see his like again.

Cliff Asness, founder and CEO, AQR Capital Management, Greenwich, CT, reprinted from Barron’s with permission from the author.

Jack Bogle sought to charge lower investment advisory and trading fees and yet raise the overall income for the advisory and management institution. How did he do that? (i) He reduced the problems of brokers commitment and sales-talk by paying brokers salaries. (ii) He in fact vested the ownership of the adviser in the investors. He created a large group of cooperative actors. (iii) Thus, he changed both structure, allocation of costs and culture of Vanguard.

To do that he had to fight for legal change and ensure an internal unique culture. Not surprisingly he attracted cost-sensitive long term investors. Jack Bogle was a unique consistent realistic dreamer for decades.

He left a legacy demonstrating that one could (i) reduce costs for investors (ii) attract personnel that cooperated among themselves and sought to serve the investors (iii) create a trustworthy fiduciary service operation and (iv) not only grow, but become an enormous, rich, and creative organization and a model for all to follow.

Jack Bogle was a fiduciary. It is not surprising that he was an adviser to the Fiduciary Institute. He will continue to live with us and guide us.

Tamar Frankel, professor of law emeritus, Boston University, Boston, MA

I had the privilege of reading the other tributes that appear here before I wrote mine. I will not repeat what others have said so eloquently, except to say that I agree with every word that was written.

I will comment on one aspect of Jack’s career that, perhaps, has not been sufficiently highlighted. He continued to make valuable contributions and to be intellectually engaged, well after he left his day-to-day position at Vanguard. Indeed, judging from Jason Zweig’s tribute, he was at his desk until shortly before his death. It is rare to find someone with the intellectual stamina and drive to pursue their profession so late in life. But working on behalf of investors was his passion, he wasn’t willing to give it up.

His achievements truly spanned his lifetime and for that he should be a role model for all of us.

Robert Huebscher, founder and CEO, Advisor Perspectives, Lexington, MA

Jack Bogle was a loyal Princeton graduate, who supported his University with both financial and intellectual contributions. Others will surely comment about these many contributions. The one I know best concerns his founding support of the Pace Center for Civic Engagement. Jack saw the Center as the embodiment of his moral conviction, that the purpose of life was to help make life better for others rather than to seek personal gain for oneself. The now-long-established success of the Pace Center, together with the new program of Bogle Fellows in Civic Service (established by Jack’s son and daughter-in-law in his honor), means that Jack’s commitment to service is well known in the Princeton community. What may be less known is how his undergraduate experience shaped his entire business career. The way I like to tell the story to Princeton audiences is as follows. Some time ago – at a sister institution in New Haven, Connecticut – an undergraduate economics concentrator named Fred Smith wrote a thesis about the way packages were being delivered in the United States. Smith argued that the U.S. Postal Service was run inefficiently and that a competing private delivery service was badly needed. The thesis was given a grade of C and was described as being totally impractical. Smith then went on to found Federal Express, on the basis recommended in the thesis.

At Princeton, a young economics student named Jack Bogle wrote his thesis on the mutual fund industry. He described the distribution system as antiquated and the fees that were being charged to ordinary investors as unconscionably excessive. He documented that the net returns being earned by investors were wholly inadequate and suggested that a new kind of mutual fund company was badly needed. I could not find the grade Jack Bogle received, but it must have been a superior one since he graduated with high honors, and the senior thesis represented at least half of his final standing in the department.

Jack went on to establish the Vanguard Group, along the lines outlined in that prescient senior thesis. Vanguard today is a $5 trillion enterprise and the most consumer-friendly financial institution in the world. Because of Jack’s vision and moral commitments, Vanguard investors have saved billions of dollars in fees and have been able to achieve better financial security and a more comfortable retirement. Warren Buffett has rightly described Jack Bogle as the best friend the ordinary investor has ever had.

Burton Malkiel, professor emeritus, Princeton University, Princeton, NJ

A call from Jack Bogle became a rite of spring for me. Each April, he would call in advance of the Investment Company Institute’s annual General Membership Meeting to graciously ask if I could join him for dinner in Washington. “I need someone to talk to at these ICI functions,” Jack would lament. “Everyone over 50 years old averts their eyes when they see me coming at the ICI,” said Jack, noting that many senior executives would avoid him. “On the other hand, everyone under 35 comes up and wants to shake my hand, saying that I inspired them to get into the fund business!” Now Jack may have exaggerated the neglect of the older generation, but he certainly didn’t overstate the admiration of the younger ones. He was a beacon for many of us in the industry and a reason that we took pride in being a part of it.

One ICI meeting in particular stands out for me. It was the 50th anniversary of the meeting and the ICI held a special dinner, to which Jack and I were both invited. As I listened to industry leaders praise their many accomplishments, it occurred to me that when the ICI celebrated its 100th anniversary, all of the celebrated people in that room would be long forgotten, save one –Jack Bogle. His achievements so tower over those of his peers that he truly was in another league. While other industry leaders fought over near-term market share, he secured a place in history and created the only organization represented in that room that one could say with great confidence would stand the test of time and still exist in its current form 50 years from now

Jack was a man for the ages. Investors for generations to come will benefit from his life’s work.

Don Phillips, managing director, Morningstar, Chicago, IL

Much has been said about Jack being a great innovator and a hell of a nice guy. I agree with all of it. I’d like to emphasize a different aspect of his accomplishment.

Economic progress is not just new gadgets and rising wages; it’s the declining cost of necessities. Jack is the most recent of a long line of entrepreneurs who’ve made consumers better off through radical decreases in the cost of basic goods and services. This line includes Thomas Edison, whose inventions cut the cost of lighting by an order of magnitude; Henry Ford, who did the same with transportation; Sears and Roebuck; and Sam Walton. Jack Bogle was the kindest and most gentlemanly of this revolutionary bunch.

Jack’s innovation not only dramatically cut costs but increased the quality of the product. As Bill Sharpe pointed out, active management, relative to a fairly constructed benchmark, is a zero-sum game before costs and a negative-sum game after costs. If you can’t reliably beat the market, an investment product that simply holds the market is a better product than a randomly chosen one that tries to beat it.

Jack intuited the difficulty of beating the market and wrote about it in his senior thesis at Princeton, two decades before Sharpe’s CAPM and market model. But it was Sharpe who created the formal framework that would allow index funds to be born, flourish, and later grow to be a dominant force in investment management. With Sharpe’s work in place, all that remained was for an entrepreneur to implement it. Both the Wells Fargo team and Jack deserve credit for successfully commercializing portfolio theory.

However, Jack also democratized it, bringing its benefits to every saver who wanted them, and for that he stands out as the foremost investment executive of our time.

Larry Siegel, author and director of research for the CFA Institute, Chicago, IL


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January 30, 20200

Ben Charoenwong & Alan Kwan

As Asian economies grow and wealth accumulates, more households turn towards experts for investment advice. There is no denying that the financial services sector in Asia has exploded. A recent industry report by Ernst and Young estimates that the wealth of high net-worth individuals alone in Asia is over USD$9 trillion as of 2016. But despite this astronomical growth in the asset management industry, the regulatory framework in Asia is still developing.

The main responsibility of an investment adviser is to provide clients advice on financial planning and asset allocation but may also help to implement such recommendations. To protect investors who might be less sophisticated, the United States and many other countries uphold advisers to fiduciary duty standards. In our research, we show that not only the fiduciary standard is important, but the quality of local regulators in the United States makes a large difference in misconduct. This highlights the importance of the fiduciary standard, but also the importance of having an international standard so that both advisers and clients can operate in comparable settings. Yet, the fiduciary duty is not a standard requirement between financial advisers and clients for most countries in Asia.

The consequence of this regulatory gap reveals itself intermittently on the front pages of financial news. Just recently in December of 2017, a large online investment scheme in China was found out to be a fraud. Founded in 2012, Qianbao.com promised returns of up to 60 percent a year and raised over USD$4.7 billion. When found out to be a Ponzi scheme, protests broke out in the Jiangsu province of Nanjing. But prior to the founder turning himself in, the official state news Xinhua news simply warned the company, “Don’t organize and don’t participate in illegal activities”. Worse yet, this scandal came on the heels of a $7.7 billion financial scam in online lender Ezubo in 2015.

The absence of a coherent regulatory and enforcement framework means that authorities do not have a systematic approach to dealing or monitoring misconduct in the investment advisory industry. As this industry grows, the role of regulators become more important in ensuring a fair environment for investors. To this end, regulators in Asia is considering whether to impose and enforce a fiduciary duty on investment advisers.

Whether financial advisers have a fiduciary duty determines the legal liability of their actions.  A fiduciary duty is an ethical and legal relationship of trust between two people. If a person violates their fiduciary duty, they are personally liable to account for the ill-gotten profits. They may face both civil or criminal legal consequences.

Compared to the regulatory environment in the United States, established by the Investment Adviser Act in 1940, the regulatory framework in Asia for financial advisers is both young and lax. For example, according to the Investment Adviser Act of 1940 in the United States, all investment advisers are fiduciaries. Investment advisers shown to commit fraud or knowingly sell unnecessarily expensive financial products may face fines, lose their advising license, or even face jail time.

Out of the 9 countries for which we could find data, only three dictates a fiduciary relationship between advisers and clients. This is in stark contrast to the fiduciary relationship required of all board of directors and shareholders for all 9 countries.

Asian countries also differ in the stringency of the investment adviser regulatory landscape. In Singapore, financial advisers are required to show their compensation scheme in writing, be it fee-based or commissions-based or both. On the other hand, in Hong Kong, financial advisers do not even need to disclose their commission rebates, remuneration, or soft dollar benefits which they receive from product providers.

 

Country Investment Adviser Industry Size
(billions USD)
Fiduciary Duty Regulator Governing Law Year Enacted[1]
China 28,000 No China Securities Regulatory Commission Securities Investment Fund Law of the People’s Republic of China 2012
Hong Kong 23,000 No Securities and Futures Commission Securities and Futures Ordinance 2002
Singapore 2,000 No Monetary Authority of Singapore Financial Advisers Act 2001
South Korea 434 Yes Financial Services Commission Financial Investment Services and Capital Markets Act 2007
Taiwan 163 Yes Financial Supervisory Commission Republic of China (Taiwan) Financial Consumer Protection Act 2011
Malaysia 151 No Securities Commission Malaysia Securities Commission Act 1993
Thailand 121 No Thailand Securities and Exchange Commission Securities and Exchange Act 1992
Philippines 54 Yes Bangko Sentral ng Pilipinas Monetary Board Resolution No. 26 2011
Indonesia 20 No Financial Services Authority Capital Markets Law No. 8 of 1995. 2011

 

Although the absence of an explicit fiduciary duty relationship between investment advisors and clients do not mean that clients are not protected, the requirements are less stringent. For example, in Singapore, the Financial Advisers Act does not impose a fiduciary duty on financial advisers. It only requires that investment advice be made on a “reasonable basis”. This means that legally, financial advisers only have the duty to represent their firm’s interests, not necessarily that of clients. Investors seeking investment advice from these advisers should be wary of how the advisers are compensated and their incentives for giving a certain type of advice.

Identifying a licensed financial adviser may also be difficult. In some countries, they are not required to disclose their registration status. The burden lies with investors to find out. For example, Singapore reserves the term “financial adviser” only for individuals who are registered and regulated under the Financial Advisers Act. However, the use of the terms “financial planner”, “financial analyst”, or “financial consultants” are not reserved and can be used by anyone.

Given the inherent conflict of interests in the financial adviser industry, since there seems to be a regulatory gap in Asia, the burden falls upon investors to understand the investment management industry. Unsurprisingly, most investors prefer to use simpler assets as store of wealth, such as bank deposits, certificates of deposit, or even real estate.

[1] This refers to the original enactment, ignoring revisions. Typically, revisions are implemented to make the regulation more stringent. The fiduciary duty requirement column reflects the current regulatory framework .