Eric Balchunas on "The Bogle Effect"

Eric Balchunas answers audience questions about his new book, "The Bogle Effect: How John Bogle and Vanguard Turned Wall Street Inside Out and Saved Investors Trillions."

Eric Balchunas

The Bogle Effect: How John Bogle and Vanguard Turned Wall Street Inside Out and Saved Investors Trillions

Fund Fees Predict Future Success or Failure

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Jon Luskin: Thank you for joining us for the 7th Bogleheads Live. My name is Jon Luskin and I'm the host for today. My co-host for today is Eric Balchunas, Senior ETF analyst at Bloomberg. In his role he writes research articles and future stories about ETFs for the Bloomberg Terminal and bloomberg.com. Today we’ll be discussing a new book, The Bogle Effect: How John Bogle and Vanguard Turned Wall Street Inside Out and Saved Investors Trillions. I'll rotate between asking Eric questions that I got beforehand across the forums at bogleheads.org, Bogleheads Twitter and Bogleheads Reddit, and then also taking live audience questions from the folks here today.

Let's start by talking about the Bogleheads, a community of investors who believe in keeping it simple, following a small number of tried-and-true investing principles. You can learn more at the John C. Bogle Center For Financial Literacy at boglecenter.net. 

We’ll be holding the annual Bogleheads conference on October 12th through 14th in the Chicago area. The agenda and speaker lineup will knock you out in a good way. Registration is now open. You can find a link to register pinned to the top of the Investing Theory and News at the General Forum at bogleheads.org. 

Also, mark your calendars for future episodes of Bogleheads Live. May 5, we'll have Dr. William Bernstein. He will be discussing how personal finance has evolved towards being less mathematical and more psychological, and how a sub optimal portfolio that you can stay the course with is better than an optimal portfolio that you can't. On May 11, we'll have Mike Piper discussing his updated book on Social Security. The week after that, we'll have Paul Merriman. On May 25, we'll have Cody Garrett and Sean Mullaney discussing tax planning for early retirees. You can see the full list of future guests at  Bogleheads Live.

Before we get started on today's show, a disclaimer. This is for informational and entertainment purposes only and cannot be relied upon as a basis for investment, tax or other financial planning decisions. 

Eric, thank you for joining us today on Bogleheads Live. I really enjoyed your new book. The Bogle Effect naturally speaks to someone like myself who loves low cost investing. I also really appreciate the format, the way you broke up different sections, and the use of ample quotes. It was a pleasure to read. One thing that I found so fascinating about The Bogle Effect, which is in part to get costs lower for investors, is that it just wasn't about mutual fund fees. The Bogle Effect is also about when Vanguard competed with banks to lower fees on money market funds, competed with asset managers offering financial planning and portfolio management for less than a third of a run of the mill advisor, and also how the Bogle effect shows up when Vanguard voted down excessive executive compensation packages.

In your book, you write, “this is the real threat, and it shows how Vanguard's mutual ownership structure is not limited to just one arena. It can go anywhere.” Eric, can you tell us more. Outside of mutual funds, where else did the bogle effect show up? 

Eric Balchunas: That's one of the reasons I wrote the book. I felt that index funds got too much credit for the index fund revolution. And there's a bunch of index funds that are on the market now that charge like 50 to 100 basis points. And that's with Vanguard in the arena. I imagine indexing would have happened. They would have eventually launched index funds if Bogle the man hadn’t existed, and the mutual ownership structure hadn't existed. Those two things were crucial. Without them, none of this happens. But because of that, indexing was a perfect combination.

But certainly I don't think it would have swept the nation the way it had.  A 50, 60, 80 basis point [bps] index fund just doesn't have the same appeal as one that's under ten. I just find that fascinating. And another place where Bogle had a major impact, where he didn't even like it, which was ETFs, which I found over and over he would dump on things that he had a massive hand in helping, smart beta, ETFs. The first ETF was launched at a .20% fee, and that was because Nate Most and Steve Bloom at the American Stock Exchange wanted to price it to tie the Vanguard 500 Index fund, which at the time Vanguard had got the fee down to 20 [bps]. Now it's way lower, it's 3. But at the time it was 20 in 1991.

And think about that. That started the ETF industry with a major advantage. Had they priced SPY at 90, 100, I think ETFs would be fringe. I really found this over and over and over. Value funds, growth funds, everywhere you look. I feel as though the low cost is really what is driving all the flows today. 

And another example with the Bogle effect that I found was interesting, I feel like introducing a cheap index fund, costs three, four basis points, changed behavior so much for the better, and it doesn't get credit. There's all these books on behavior and psychology, and that's great. It's fascinating stuff. You have to hang in there, but it's so much easier to hang in there by having a low cost index fund. You can easily just now resign to the fact that you've got the best possible deal. You don't need to hop anywhere when the market gets bad. And I just find that's a tremendous gift to behavior, which is what the last chapter is about.

One more area is trading. Vanguard went commission free ETF trading a year before Schwab, Fidelity, and all the rest went commission free. And he didn't like that – Bogle heated trading. So again, it is just fascinating that the Vanguard ownership structure in Vanguard and Bogle, the amount of impact they've had already and will have for decades to come. I couldn't think of a meatier topic to try to explore. The question was how to make it interesting enough for a non nerd. I'm not sure if I pulled that off, but I tried my best. 

Jon Luskin: That's certainly a fair point. I'm not able to answer that question successfully. As a complete investing nerd, I really enjoyed the book, but also as an amateur writer, I appreciated just the format of the way you laid it out. It was easy to read.

Eric Balchunas: Well good. Thank you. I went above and beyond and interviewed 50 different people. I did that with my first book on ETFs, and when I would go places that book didn't make the New York Times Bestseller list. This one probably won't either. But when I went around and I met somebody who read it, they were like, “oh, I really like the quotes because it gave the book a feel, almost like a semi documentary.” And I liked the idea that my narration wasn't going to lift the whole thing. Plus, as knowledgeable as many other people in the history of Vanguard, or behavior, having those expert voices in there assisted me and hopefully broke up and made the book more entertaining. 

Jon Luskin: Wonderful. David, you could ask your question to Eric about the Bogle effect. 

David: Thank you so much for the book and thank you for joining today. I'm interested in what you learned about the entity through your endeavors. I kind of think that everybody uses the term low cost, but I like to kind of think of it as an economically rational cost that lets them run an organization. Some people argue maybe that the employees are not paid as much as maybe working for another broker or something. I don't know if that's necessarily true over a long period of time, given the way, perhaps, people are compensated at Vanguard. I'm not sure about that, but I like to think of it as an economically rational cost that can make the employees happy and the clients happy. 

And everybody kind of thinks of Vanguard, to use your language, a low cost index provider. But I could be wrong on this, but I think like, half of their funds are actively managed. They have factor based strategies. So I'm wondering, what did you glean about the long term kind of sustainability of the organization? 

One of the null hypotheses that I have, it's going to be an extremely difficult organization to replicate. It might get too big for its own good. I was wondering, through writing the book, what did you learn about the organization in terms of where you think it will be ten years from now?

Eric Balchunas: It is pretty rational to me. People here are paid very well. People get paid fine. I try to explain this to people. Salaries there aren't horrible. They're pretty good. Maybe perhaps somebody could get paid better if they moved to New York and worked at a big asset manager or hedge fund. The CEO gets paid pretty competitively. The difference with Vanguard is there's no owner that has $50 billion. No one's getting tens of billions of dollars like in an Amazon or a Tesla. And so that's a big difference. 

And that was part of the fascination, as why would this guy turn over all the future billions? And that's a question that I tried to dig into in chapter four called Explaining Bogle, because nobody's copied it. Because there's no economic incentive to do it. But he took upon this mission and obviously it changed everything.

In terms of the company, they're going into a lot of different areas that the Bogleheads aren't thrilled with or think that are un-Bogle-ian. And I'm torn. I think on one hand they're not--Bogle was more pure, I think, than the company-- is going. On the flip side. You could argue that maybe wealth management needs a little more disruption, maybe private equity needs some disruption. ETFs certainly were a place he didn't want them to go, but I think most people are happy they did.

I see them going further and further. I think the one Achilles heel of the company is customer service and just getting so big and having so many customers and maybe not enough money to service them all properly. That was one complaint that even people who loved them had. Even people I interviewed who had their parents and their uncle or brother in law, whereas Vanguard had called them and complained they loved the fees but they didn't like the service. They’ve got to work on that. That's probably something that could hurt them.

This idea of a mutually owned company, and it hasn't happened yet, but the whole industry, maybe not the whole industry, but a huge chunk of the industry is now governed by this structure. In order to get flows, there are small little lanes – you can get flows outside of this – but the big blob of flows, you have to have a low cost index fund to get flows. Look at Fidelity. That's where most of their influence comes from now. BlackRock, low cost ETFs. So everybody kind of has to copy them. Which is again why I used the Bogle effect. And not just a book about Bogle. It was more about the effect, which is just huge. 

And you're right, they have all different kinds of products – active, smart beta, and they're the biggest issuer in a lot of these areas. Now they’re the third biggest in active mutual funds, which I find fascinating given how much Bogle dumped on active for 35 years. The fact that they're third--this is also a premise of my book--if indexing wasn't a thing and Vanguard were doing only active mutual funds, I premise they'd be the biggest active mutual fund manager four or five times over today, simply because they'd be bringing a gun to a knife fight over and over in every asset class.

It comes back to the ownership structure as the key variable. And Bogle structure. I find that guy was built differently, and those two things collided to create this explosion.

But to your point, I think Vanguard's more abnormal. It's rational, but it's abnormal because in capitalism, there needs to be an economic incentive to start something and there just isn't. In Vanguard's case, there was more of a “keep my job” incentive. The serendipity involved for the creation of Vanguard was a freak accident.  In a normal environment, there's no incentive to create a company like this, but it's changing almost every aspect of the financial industry.

Jon Luskin: I think you nailed a bit about the economic incentive bit. One other Bogle effect,. maybe we're not seeing it yet because not enough things are low cost and Wall Street is still too profitable, but what you touch on in the book, and it's just a fascinating idea, is that if the financial services industry does become lower cost, then it's going to be less of a profitable venture for those going into it. So there is going to be less of a brain drain from other areas into finance. So if you can't make a bunch of money in finance, maybe you're going to go become a doctor or scientist instead. Without that brain drain being drawn to what is no longer going to be a really profitable industry, arguably, you're going to have brighter people in those other areas that can actually make a better benefit for society, as opposed to just small people making a bunch of money for themselves. Really fascinating concept that you touched on in the book. 

Eric Balchunas: Yeah, and obviously this hurts my company. And I realized this, and I admit it throughout the book. I'm like, look, this is not good for many of us in the financial industry. A lot of these big legacy mutual fund companies that are probably going to whittle down over the years are our clients. But I'm an analyst and I'm just trying to get it right and sort of give a glimpse into what the future is going to look like.

But obviously, if all the rest of the asset managers made what Vanguard made, the revenue would drop 85%, and all the flows are going to what Vanguard makes. So you only have to do the math and go, well, maybe it doesn't drop 85%, but it's probably going to drop. And Bogle predicted this. He actually, and this is crazy, I mean, this is part of the – I did not know he said this until I started researching, but he gave a speech to employees in 1991 in which he said, ”I'll know that Vanguard's mission has begun to make a better world for investors when our market share begins to erode”. And then beyond that, he talked about there's probably going to be a reallocation of talent after Vanguard's done doing their thing. He said that in 1991, before Vanguard had less than 1% of the assets that it has today. This is a pretty crazy vision, in my opinion.

First of all, whoever wishes for the market share to grow, that's just like the different trip he was on. But ultimately what he meant was that if Vanguard's market share erodes, it means that everybody else has got very cheap and competitive and it's heading there. Fidelity, Schwab Invesco, Spider, Goldman, JPMorgan, they all have under five basis point beta ETFs or funds now, and that's where a lot of their flows come from now. The majority of them.

It's probably going to happen at some point, I think Vanguard probably gets to 40-50% market share before that happens. Right now they're at about 27 ish. I don't know. This is some heavy duty stuff. I'm torn because I work in this industry and I enjoy it. But at the same time I'm an analyst trying to analyze the industry. To me, I write about this in my notes because we have asset managers follow us. I'm trying to give them some warning that this is going to be a big deal if and when the market stops going up all the time, which is starting to not. This is when we will start to see some of the hollowing out that has taken place over the last 15 years. 

Jon Luskin: Eric, chapter eight is one of my favorite chapters in the book. I think it's the best because if you're an investing nerd arguing for index funds all day long that chapter debunks many of the arguments against low cost indexing. What's your personal favorite busted myth against low cost indexing and why? 

Eric Balchunas: Probably the biggest one is weak hands. There's this thing for the last 15 years that oh, wait until there's a sell off, all these passive people are going to  run for the hills. It just isn't the case. Every selloff has shown that the passive funds take in cash. Most people who are in passive funds were not put there by a broker. They sought it out and they thought this is a good deal, this is what I want to put my nest egg in and they just don't really feel the need to move. I think it's the active funds that people were put there by somebody who got paid off or maybe they chased the hot manager back in the day and now that person is underperforming. That's where the weak hands are going to come from, at least in the next sell off.

That's one where I'm baffled on that prediction because we've seen many sell offs since. Perhaps it gets so bad where even passive starts to rotate or bail. But I think we'd see a lot more other people selling first. I think if anything, the index fund people are probably the last to sell, not the first. I think they're actually strong hands. So I think weak hands are actually the strong hands and the dumb money is actually the smart money. So those are two things I hear a lot but feel are completely opposite. So maybe that's the one that I found the easiest to refute because you just show a chart of the flows during sell offs and you can see it. 

Jon Luskin: Absolutely. That's a pretty common one you'll see by a lot of the advisers out there, ”hey, you need me, otherwise you're going to sell.” But we see that do-it-yourself investors are quite financially savvy. They do have those diamond hands, if you will. Jessie, you can ask your question to Eric about The Bogle Effect. 

Jessie: Hey, guys. Jon, thank you for putting this on. Eric, thanks for being here. Eric, I really like the theory of the index fund bubble. Now, I don't believe it. I don't think there's merit there, whether it was Mike Green or Michael Burry talking about this index fund bubble. I'm just curious if you have any thoughts that you've accumulated over the years on that theory.

Eric Balchunas: I addressed it in the book. I love Mike Green, he's a great friend. And Michael Burry is just so fascinating, so total respect to both those guys. I don't totally agree with Mike, but we've debated it many times. The one thing I have a hard time getting over on the index fund bubble is the fact that if you look at active mutual funds over the years, they tend to own the same stuff. A lot of them are largely beta. They own a lot of--if you look at the Fidelity Magellan--the top holdings are in fact, I can pull it up right here because I'm still in my terminal –  it's basically Amazon, Apple, Microsoft, Google, Navidia, Visa. I mean, you get the idea, right? 

So maybe there's a little bit, some weightings are a little higher than others, but for the most part this is what you were buying back in the day for 70, 80 basis points, maybe even more. Now you get this almost in the same order, but you get it for free. And so I think a lot of it has been just a format change. It reminds me of the music industry. People used to pay $16.99 for a CD, even though it only cost them a dollar to make. That industry should have lowered the prices of CDs when they had the chance as well. The MP3 comes along and then bam, you get everything for a fraction of the cost. And investors have no loyalty. They're happy to get Bob Dylan or whatever, Radiohead, Taylor Swift for the younger people through digital instead of buying a CD for $16.99. And by the way, the CD also had songs that probably weren't that good. Now you could actually target the songs you wanted in a flexible format and way cheaper. Uber did the same thing. Uber destroyed taxis by being way better. This disruption isn't that unusual. That's the difference. It's simply a format change. The music one works well because people still have the same taste. They want exposure to the biggest, best American companies. Now they're just getting it for three basis points instead of 80. It's a logical move. I find that there is no bubble because people were going to own these stocks anyway. 

The only thing I will acknowledge is that the index fund buys more indiscriminately. So perhaps there's a little bit more bubbleliciousness in the mega caps because it's forced to buy those. However, I would argue we have seen stocks come up and up into the S&P 500 and then down out of it. Macy's got kicked out, Tesla got kicked in. It's pretty common that active, if they don't like a stock, is going to sell it off. We've seen it after earnings reports in the past couple of months, even, let alone years. So active is still in control and will ultimately organize where those stocks situate in the index. The index is a free rider. 

I will definitely grant active that an active job is important. So I do think that that said, though, it's not like the index is some other thing. It's literally the same stocks you were holding or we're going to hold anyway. And I think that's the main problem I have with that argument. And indexes are designed differently. The S&P has filter requirements. There's a human committee and that's supposed to be called passive? And it's only large caps and you have the total markets, then you have the Russell 1000. 

So in a way, all the indexes actually have different design tweaks, which you could argue they're active. And so my statement on that is that passive is largely a myth, but low cost isn't. And that's what this whole thing is about. And that's why I also wrote the book Indexing. It's really about the cost. And that's ultimately why I disagree with that bubble theory.

But that said, there's a lot of flows going into index funds, although I will say that $2 trillion has gone into index funds and ETFs that hold equities over the last ten years. But the stock market has grown by 43 trillion. There are plenty of other sources of fuel buying stock. So anyway, I guess that's my sort of take on that. But I'm open for debate. We're always going to look at this. And there's a few pockets where index funds get a little very big for their area, like REITs, because of the yield chasing, there's been some REIT ETFs that have owned a lot, a big chunk of REITs or Junior Gold Miners. So there are pockets where indexing probably gets a little too big. But in the main broad area, I don't really see a problem, at least not yet. 

Jon Luskin: Absolutely. I think a lot of that stuff is unfounded, just scare tactics by those active managers losing money or just the media looking to get clicks. Ross you can ask your question on the Bogle effect to Eric.

Ross: Hello, Eric. Jon, thanks for doing this again. Eric, I just want you maybe to share some thoughts, not just with Vanguard structure and the cost of the funds, but Jack Bogle spent a lot of time writing about investor behavior and how investors should behave in the markets. And I just wonder if you would like to comment on how his views on how investors should behave impact the asset management industry. 

Eric Balchunas: Thanks. Chapter ten is called The Art of Doing Nothing. The publisher wanted me to have that as the title. He thought it was just so catchy. I didn't invent that phrase. I believe Ben Carlson may have first said it. It's a great phrase and it's a more interesting way to talk about behavior. It's hard to do nothing. It's an action. Bogle is even more against trading than he was against high cost. If he had a Ten Commandments, trading and cost would be like one and two. I don't know which would be first. They'd probably be a tie. This was a big deal for him. He constantly ranted and railed against trading. He hated the fact that the stock market turnover got so big that the whole thing was just trading and there was just the core purpose of what companies went public for was being abused and mutated into this gigantic casino. He wrote several articles about that. He would say things like, “it's an orgy of speculation.” 

He saved his most savage language for the trading. He had this John Lennon kind of Imagine line in one of his books. Imagine a day when nobody sold anything and the stock market lay fallow, silent all day long. And that's how hardcore he was. I'm okay with trading. It's legal. You can do it. Some people keep 10% of their account to go wild with so they can scratch an itch and not touch the 90%.

But the stats that Bogle really used for this, he thought the numbers he put into it, I just quote him “is that if you try and pick stocks yourself and you trade on Robinhood or whatever, you're probably only going to get something like 65% of the market returns, which is even less than an active mutual fund gets.” So as much as he railed on active mutual funds, he thought doing it yourself by stock trading would get you even less of the investment returns to the market over the long term. 

He came down to the conclusion that you just should buy the total market and hold it forever. Obviously, this didn't really catch hold to everybody. There's a “big long advisors” sort of riffing off of The Big Short, whereas the big short was some hedge fund guys who saw a crash coming. The big long advisors saw the benefits of buying and holding, and they were right. They've grown wealth probably the most out of anybody by staying in there. So there's people who I think followed him, and those index investors probably are showing how good you can behave over time. 

That said, like the Robinhood thing, that's clearly people who could care less about what Bogle is saying because they're trading like crazy. And the retail component of total trading is actually going up, especially during the pandemic. I asked a few people who I interviewed, what do you think Bogle would have said about the Robinhood, Yolo trading thing? And people were like his head would have exploded, he would have lost it. People had fun imagining how some of the quotes he would have had over the past two years. This is an ongoing thing with him.

I don't think people are going to ever stop trading, just the way it is. My theory in the book is that an index mutual fund obviously helps shrink your need to trade a lot. The other thing is as you get older you calm down a little bit, you have obligations or you have a bear market that shows you it's harder than you think. A lot of the trading we see today, younger people who haven't gone through a bear market, they're probably going to learn the hard way over the next couple of years that it's not that easy and they're going to get maybe a family and a mortgage and they're just going to get busy and resigned to owning the whole market and not have to worry about it. But I do find there's also maybe a cyclical aspect to it. But he certainly was very much adamant about why you should never trade. That's why he didn't like ETFs, despite how much they advanced indexing and low cost. 

Jon Luskin: Absolutely. Eric, let me ask you a related question about what you just talked about and that is there is a common argument that do-it-yourself investors are ill prepared for market crashes and therefore they need to pay high fees to investment professionals to make sure that they don't bail out. Yet you share the opposite, writing, “Passive funds have more loyal, better behaved younger investors with more time on their side.” Does this mean that high fee funds will only last for another generation? What do you think?

Eric Balchunas: There's dirt cheap and there's shiny objects which would be semi ETFs, crypto, Cassie Wood, lottery tickets, the options market, ETFs that package a trade or do something that's alternative, there's a good lane for that active and you can charge over there. So my theory is, the middle is in trouble. And what I mean by the middle is if you charge 80 to 100 basis points and you're trying to eke out 2% or 3% outperformance over the S&P, it’s a tough spot. I even think the bond managers are going to get hit with this problem eventually, although their fees were a little lower to begin with and bonds are seen as more complicated. They're in a better spot. But I think over time there's an endangered species starting with large cap active high cost funds. The flows show it. 

And also if you talk to people this is not what people want. And to me that would be the middle. There are some active funds though, like in smart beta funds like Avantis and DFA that are really low cost. And Vanguard, by the way, that are active, that are below 30-20 basis points and they do okay. And Morningstar has this great study showing that there's a clear correlation between how cheap you are and what percentage outperforms. The cheaper quartile of active funds tend to have way higher beat rates. 

Which also is a part of the book I go over called Bogle Metrics. I didn't think Bogle was anti-active at all. I think he was anti not fulfilling your fiduciary or stewardship duties. And he thought that not sharing economies of scale when you had all this money was the problem. Because he does talk about focusing on costs and turnover and he limited those things in the Vanguard active funds like Primecap and Wellington, and those do pretty well. And he tended to credit that. It reminded me of Sabermetrics where they looked at on base percentage instead of the more sort of sexy batting average number. So again, I don't think he was anti active is my take in the book. If you're in dirt cheap or shiny object lane, you're probably OK. Whether you're active or passive in each lane doesn't matter that much. Or it matters less than it does because there's successful cheap active that still see inflows and there's successful really high octane active that sees inflows that cost a lot more.

But the thing is, those lottery tickets are able to beat the benchmark three times, not 3%, if they work. That's why we're bullish on things like themes and why we frequently say that Cathy Wood is an ironic byproduct of Bogle because the more the index funds and cheap beta confiscate the core of the portfolio the more some of those investors will look for highly volatile things that are completely different. And they'll have a tolerance for those things because they are merely a little dab of hot sauce on the otherwise larger meal. 

That's where things are headed. Active is not dead, it's just evolving. And it's probably going to be more of a supporting role in the future and not the main start.

Jon Luskin: The not quite investment nerd expression for that is going to be core and explore. We've got the vast majority of our money in the super boring, plain vanilla low cost funds and then we'll take a little bit and we'll have our cowboy account, our fun money account, our Vegas account, and we'll do pretty much whatever we want to do with that because most of our money is in the tried and true super boring, super proven low cost stuff. And then if we do lose a little bit of money with this little fun money account, it's going to be okay because again, most of our money is going to be in that super low cost diversified stuff. That Morningstar study, I’ll link to that in the show notes, that is such a great one--it shows that cost dictates future performance. So keeping costs low, that is going to be an investor's best bet. 

Eric Balchunas: Can I jump in here real quick? There's one thing that is interesting in the book that I found. When you talk about paying the 1% for the active mutual fund, I think, again, that is an endangered species area, but there has been some people who bring up the point, well, yeah, you're getting your index fund for three basis points, but you're using an adviser who charges a 1%. And the amount advisors manage is now 26 trillion. And it's grown a lot because the market's gone up a lot. And I do wonder in the book, because they drive a lot of the low cost index fund flows once they went from broker to fiduciary fee-based RA’s, that's a real catalyst to go passive. And I wonder sometimes if they're making the same mistake that those active funds did in the ‘90s. Maybe that's the next spot where there's this sort of Vanguard or Bogle effect to play out.

The one difference is they have relationships with their clients, and I think that relationship will definitely help as opposed to a fund, which may underperform, but you don't personally know the portfolio manager, but you know your advisor. This will be an interesting concept that will play out. But I do see an interesting parallel with the advisors and the 90s active mutual funds. I'm not sure if you see that. I'd be curious to get your thoughts, actually. 

Jon Luskin: Yeah, it's fascinating. Firstly, we're seeing this with Vanguard already. They've got the 30 basis .3% portfolio management service over at Vanguard. It's not just limited to Vanguard, you can get professional low cost portfolio management over at Betterment. So absolutely, there's certainly fee pressure for the portfolio management piece. 

One thing that you mentioned just now. Eric, and it's fascinating because I just had this exchange yesterday. The engagement that I worked with, a lady, she had roughly a million dollars, getting divorced and she worked with a regular portfolio manager guy who helped see her through the divorce process. Giving her some financial planning advice along the way. Max out tax advantage retirement accounts etc. Having given all the value, having created the relationship with respect to the financial planning, he proposed. “Hey, let me manage your assets of $1 million for my fee of 1.45%.” For folks who aren't investment nerds, that means that this lady would be paying $14,500 for portfolio management every single year forever. So this lady who even called herself numerically challenged, knew that that was going to be 14 grand plus every single year forever. She decided that it wasn't worth it despite the little bit of financial planning that that adviser did.

So certainly I think you're right, there is going to be some stickiness when it comes to folks continuing to pay what is now relatively higher professional portfolio management prices. But I think as financial literacy continues to increase, folks are going to do the math. A 1% on a million dollars is $10,000 a year, every year, forever. I don't want to pay that. I can manage it myself. And that's the approach that a lot of Bogleheads take. 

Eric Balchunas: I think you're right. Anyway, I explore this in the book as well, because again, it was an area where it showed that the Vanguard effect wasn't just a mutual fund thing as well.

Jon Luskin: Absolutely. The Bogle effect is pervasive. Again, as mentioned earlier, it's going to touch on those executive compensation packages as well, getting those costs low. That's the Bogle effect. And it's going to show up everywhere. Pretty neat. 

Well folks, that is all the time we have for today. Thank you so much Eric for joining us and thank you everyone who joined us for today's Bogleheads Live. Our next Bogleheads Live will have Dr. William Bernstein discussing how personal finance has evolved towards being less mathematical to more psychological, and how the suboptimal portfolio that you can stay the course with is better than the optimal portfolio that you can't. We have Mike Piper discussing Social Security.

Until then you can always access the Bogleheads forum, Bogleheads Wiki, Bogleheads Reddit, Bogleheads Facebook, Bogleheads Twitter, Bogleheads YouTube, the Bogleheads local chapters, Bogleheads virtual online chapters, the Bogleheads On Investing Podcast and Bogleheads books.

The John Bogle Center For Financial Literacy is a 501(c)(3) non-profit organization at boglecenter.net. Your tax deductible donations are greatly appreciated. Thank you again everyone, look forward to seeing you all again. Until then, have a great week.