Speech given before the Boston Security Analysts Society on February 24, 2006

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This article does a great job of putting the costs of “financial intermediaries” into perspective.

The Motley Fool – March 16, 2006

This year I’ve decided not to call the pilot, pop on to Vanguard’s G-4 and jet to Davos. Partly because we don’t “do” corporate airplanes. Partly because I’ve never been important enough to receive an invitation to the perennial World Economic Conference. But mostly because what was once truly a global economic conference has become a “happening,” a magnet for the rich and famous — including business stars and Hollywood starlets — to see and be seen, sort of like walking on that red carpet to the Oscars.

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The amazing disappearance of the individual stockholder as the backbone of the U.S. stock market has been one of the least recognized but most profound trends of the last half-century. As shown in the chart nearby, direct ownership of stocks by American households has declined from 91% in 1950 to just 32% today.

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“Most of the mistakes and major faults of the financial era that has just drawn to a close will be ascribed to the failure to observe the fiduciary principle, the precept as old as holy writ, that `no man can serve two masters’ . . . . Those who serve nominally as trustees but consider only last the interests of those whose funds they command suggests how far we have ignored the necessary implications of the principle.”

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Recently described on these pages as “a strange law enacted in 1940,” the Investment Company Act is the foundation of the modern mutual-fund industry. It requires that funds be “organized, operated, and managed” in the interests of fund shareholders, rather than in the interests of their managers and distributors.

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The rapidly cascading mutual fund scandals have brought unwelcome attention to 11 major firms that manage about $1 trillion. For an industry that only six months ago was bragging that “We’ve never had a major scandal,” it’s been an astonishingly rapid comeuppance. Yet who could have imagined that the fund managers who aided and abetted the pervasive market-timing scandal would be brought to the bar of justice by “Blue Sky” laws? For most members of the financial establishment, these laws had been consigned to the dustbin of market history.

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Well-deserved attention has been focused on the $140 million compensation package received by Richard Grasso, the recently departed chairman of the New York Stock Exchange. Undoubtedly there will now be significant changes at the NYSE Board. But the real question is why that Board, with representatives from the most sophisticated firms on Wall Street, agreed to pay its chairman such a rich compensation package. There is only one conclusion: He was worth the money.

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Congress is now considering legislation that would strengthen the independence of mutual-fund boards of directors from fund managers and require cost disclosures to mutual-fund investors. Both measures would serve to increase the share of financial-market returns that fund investors earn.

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When I founded what is now the country’s second-largest mutual fund organization 27 years ago, I did my best to create a company that would live up to the ideal enshrined in the preamble to the Investment Company Act of 1940: that mutual funds should be managed in the interest of their shareholders rather than in the interest of their managers. Now the industry I helped to create is squandering an opportunity to show the public that this ideal still matters.

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