Revisiting a few of the suggestions arising in the text preceding, although no longer with us one is impressed with some of Jack Bogle's recent concerns about what might lie ahead for individual investors. In addition to what he considered the high costs burdening the average mutual fund stakeholder (an average of roughly .6 of 1%, or 60 basis points, he was most concerned with the way in which the US equity market had morphed into a high frequency turnover speculative arena dominated by black box-driven algorithmic trading programs (today, roughly 85% of daily equity market transaction activity). Individual investors, understanding it or not, have become part of a series of nanosecond ownership binge approaches in which the fiduciary and stewardship responsibilities of the portfolio manager have been subverted to publicly-held fund company profit margin objectives. Rank speculation has replaced the long-term view as the clash of these cultures plays itself out in daily trading volume averaging 4-5 billion shares in the US alone.

As to the future of his own Vanguard Group, Jack was worried that his creation might grow into a behemoth no longer able to provide the accurate and timely administrative experience clients would expect from the world's 2^nd largest money management organization. Indeed, today's Vanguard ($5.6 trillion in assets under management, 30 million customer accounts, and 22,000 employees), judging from the experience of a few of the non-profit investment committees chaired by this writer, would indicate his reservations were prescient.

Jack was also uncomfortable with the role passive fund directors might assume in the governance of corporate boards of the companies in their portfolios; worried that such representatives might change the character of the relationship between shareholder and operating company management.

Beyond these concerns, he wondered if the evident success of the passive approach continues (in the US alone today $4.2 trillion in such fund and separate account vehicles vs. $4.2 in actively managed funds/accounts), might affect the securities pricing role that traditional in-the-field research and active stock picking played in determining what investors would pay for a dollar of corporate earnings per share? In other words, if the passive approach became overwhelmingly prevalent in the equity markets, how would the capital pricing equation be calculated?

Jack was also troubled by Vanguard's dominant ownership position in the tax-exempt bond marketplace. By his measure, Vanguard's combined customer account holdings (in passive as well as separately managed funds and accounts) in the $4.1 trillion total US tax-exempt market already exceeded 20% of issues outstanding, giving rise to a potential liquidity crunch in times of market stress, or should a major shift in fixed income portfolio strategy need to be implemented.

As discussed in earlier chapters, the character of this market has also changed - from the days when a wide variety of broker-dealers (although that number has fallen 40% to 776 since 2006)¹ at one time posting their inventory on the daily, hand-delivered Blue List to an order-crossing agency-only electronic billboard listing available supply to a worldwide audience. Should a large number of players in this arena wish to get out the door at the same time, a liquidity crisis of the first order would be a real possibility.

A final legacy which Jack's son, John Bogle, Jr. (an active hedge fund manager located in Wellesley, Massachusetts) conveyed during a Vanguard Group corporate memorial service held on its home campus in Malvern, Pennsylvania, in April, 2019. It had to do with his father's almost obsessive concern with the excessive management and administrative costs charged the average non-Vanguard investor. John had asked the Vanguard Research people to try to calculate what its investor constituent population had saved in fees (vs. the average managed fund holder) since the company's founding in 1976. The amount of savings, using a Vanguard average fee of 8 bps against an active fund manager rate of 60 bps, turned out to be $990 billion over 36 years; one of the reasons Warren Buffett suggested that if ever a statue were to be erected to an individual who championed the cause of the individual investor, that individual should be Jack Bogle.

Recent developments in the brokerage world and referred to in the preceding material have nearly closed the loop that Dean LeBaron, founder of Boston's Batterymarch, first proposed in the early 1970s. His outlandish assertion then that brokers would eventually be paying the buy-side for the privilege of order execution came one step nearer with Schwab's recent announcement of commission-free stock trading (Fidelity and most others have since fallen into line).

As beneficial to the individual as this might sound, as usual it remains buyer-beware since behind the curtain lurks a still very favorable arbitrage for the executing broker. As an example, for Schwab the float and all uninvested cash generated by such "free" trading is swept into its bank money market fund earning subsistence rates (today ~55 bps), and in turn is loaned out to fully secured borrowers at ~250 bps. With in excess of $200 billion in such funds on deposit, Schwab's bank earns a substantial amount on the spread. Other brokers offering advertised "cost-free" execution are playing the same game.

The other issue mentioned in the foregoing text focused on the fiduciary vs. agency debate raging between Wall Street's sell-side and the registered investment advisor (RIA) fee-for-service community. Using the business card title of "Advisor," many brokers on the sell-side have allowed their customer base to assume a fiduciary-like assurance behind the flogged securities. But rather than holding their customers' interest primary and foremost throughout as a fiduciary by law must, the brokerage world has succeeded in diluting its legal responsibility to a standard of conduct that is a mere measure of suitability at the time. This is in the end a case of the Street exercising its financial and lobbying power on an uneven playing field to water down what would seem a logical and ethical arrangement between customer and vender. The SEC, FINRA, IAA, and US Labor Department at the Federal level, and some States' Attorneys General, are currently engaged in negotiations about this, seeking a national uniform standard.

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¹ The Wall Street Journal, October 10, 2019, p B1.

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