John Bogle, founder of passive investing giant Vanguard, believes that the animating force behind the stock market is to make money — just not for investors.

In a recent interview and a separate letter to the editor, Bogle makes the case that virtually all stock trading benefits the handlers of that money and not retirement savers.

That Bogle is anti-Wall Street is not surprising. What is shocking, at least to him, is how completely retirement investors have bought into the idea that stockbrokers and mutual fund managers somehow act in the interests of investors when the evidence shows that the opposite is true.

“Outside ownership of mutual funds is the real problem. They’re trying to earn a return on their capital instead of yours,” Bogle told InvestmentNews in an interview published June 9.

Bogle took issue with the fundamental problem of fee disclosure, costs which create a drag on investor accounts and siphon off huge amounts of retiree money over the years.

Bogle recently was joined onstage by my partner, Rebalance Managing Director Scott Puritz, to welcome a new Department of Labor rule that requires retirement financial advisors to be fiduciaries — and to disclose the real cost of investing to clients.

Asked how he would change the retirement business, Bogle immediately zeroed in on the hidden costs of owning mutual funds. Many stock brokerage clients realize that they pay their advisor a hefty fee — 1% of their assets each year — but few fully understand that mutual funds add another 1% or more to their costs each and every year.

High fixed fees, applied to the account balance regardless of investment returns, end up costing retirement investors between a third and half of their total gains over the decades, something almost none of them recognize until it’s far too late.

“I’d change the structure — have them live up to the name and be mutual and be more honest in their disclosures. Cost makes the difference — and we haven’t even talked about inflation and taxes,” Bogle said.

In a letter to The Wall Street Journal published the next day, Bogle took issue with a Harvard Business School dean’s argument that Wall Street is an important part of the U.S. economy.

Dwarfed by speculation

While it’s true that raising capital is part of why Wall Street exists, that form of financing is absolutely dwarfed by speculation, Bogle noted.

“The proportion of Wall Street’s activities that involves equity capital formation is minuscule. According to Sifma, equity underwritings totaled $256 billion during 2015, while the volume of stock trading totaled $48.6 trillion. So trading by speculators and investors represented 99.5% of this total activity on Wall Street,” Bogle wrote.

Effectively, Wall Street spins money for its own ends, not to help U.S. corporations get financing they need. Instead, speculation diverts the earnings of those same corporations from the pockets of the owners — many of them individual retirement investors or pension funds — and puts that money into the pockets of traders,  Bogle argued.

“Trading is inevitably a zero-sum game before costs, and a ‘loser’s game’ after deducting the high costs of all those transactions. In economic terms, trading is a ‘rent-seeking’ function which subtracts value from Wall Street’s customers,” Bogle wrote.

Bogle often marvels at how long it has taken the big retirement firms to follow Vanguard’s lead and lower costs by offering index funds to their clients. Now, most of them have, and the Department of Labor fiduciary ruling will speed our evolution toward lower-cost, higher-return investing for all.

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