John J. Brennan knows there is some irony in his being the chairman of the mutual fund industry's trade group, the Investment Company Institute.

After all, he also heads Vanguard Group, the nation's second biggest fund company and one of the industry's noisiest critics.

Vanguard founder John Bogle, who handed the company's reins to Mr. Brennan three years ago, has relentlessly ripped his competitors for charging what he calls exorbitant fees.

The low-cost index funds that have helped Vanguard amass more than $450 billion of assets under management are anathema to its big rivals who offer only actively managed funds. Those portfolios often underperform index funds but charge more anyway.

So what is it like representing the very companies that cringe every time Mr. Brennan's mentor delivers one of his fiery sermons? Not a problem, the 44-year-old executive insisted in a recent wide-ranging interview with American Banker.

The son of a banker-his father was chairman of a mutual savings bank in Boston-Mr. Brennan has a more low-key, diplomatic style than Mr. Bogle.

But Mr. Brennan, who has led the ICI since October, has strong opinions on everything from banks as mutual fund managers to regulation of the $5.5 trillion industry to the dark side of a roaring stock market. Excerpts from the interview:

The amount of money Americans have invested in mutual funds has increased more than fivefold since 1990. Can that kind of growth continue?

We ought to be well-positioned to grow. We still have arguably the best financial services product out there. It's better than a bank account, it's better than an insurance product, and it's far lower-cost than both on average. So there are a lot of structural dynamics and demographics that are in our favor.

But it is not preordained-the market is always the wild card. If the market (falls) to 5,000, the growth of this industry's going to be a lot slower than it would be otherwise. We've had a run in the markets that's unbelievable. The biggest issue is people's being unfairly disappointed in the markets.

Are you saying that the fund industry could become a victim of its own success?

Complacency is obviously a big issue. Do you expect that you will take in $500 billion in cash flow or whatever it is every year, and have you set your fundamental economics around that kind of growth? It's a big issue.

It continues to be the big test: How will our investors view us as an industry or as Vanguard after two years where the markets are down five, down seven (percent a year). Nothing dramatic, but where those quarterly statements don't look so good.

No matter how much you know about this business, you can easily get lulled into thinking, "Wow, I only made 15% last year"-as opposed to "WOW! I made 15% last year!!"

What sort of thing could trip the industry up?

A fund manager putting his or her interests ahead of the shareholder's. I think that would be probably the most damaging thing that could occur, and a lack of action and attention on the part of the industry to that type of problem.

A major credit failure would be the other one you could think about which would drive money market funds off the buck. Like Orange County ... you could see that shaking investors' confidence. Then you say, 'Well, you haven't said anything about the markets,' and my impression is investors are sophisticated enough today to understand that as much as we'd like to, we can't control the markets.

How about disclosure? Are fund companies doing a good enough job informing investors about costs and risks?

It's probably never good enough. Before 1994, did we know anything about the risks inherent in inverse floaters and derivatives? Probably not. Nor did the shareholder. We as an industry have to be on top of risk disclosure regularly. I think it's always got to be a hunt for us because a mis-sold product is in no one's interest.

The ICI has helped win the public's trust in mutual funds. Now that your membership is so big and powerful, how do you convince people you're still looking out for the little guy?

It's hard work; it's the little guy both in terms of the fund sponsor and the investor. We have a dues structure which encourages anybody that has a mutual fund to join. It's very inexpensive because we want the big tent, to get them in and get them acculturated to the sense of integrity and fair dealing that's required in our industry, and to the fact that this industry is driven on trust.

We've created a trillion-plus-dollar banking business without a dime of deposit insurance-i.e. the money market fund business. Think about that. There's no "FDIC Insured" sign in the window, so it's all trust.

Do you think it's ironic that a Vanguard executive is in charge of the ICI?

The ideas of low costs, disclosure, and tightly defined investment products are ones that are hard to argue against, so it's not as ironic as people would say. How we go about it is different, but the ICI's job is not to tell us how to compete.

I wouldn't have taken the job if I thought it would be either uncomfortable for the membership or for me. But we did a lot of talking about it. I wanted to test people's sensibilities to my being in this job, and frankly, some of my fiercest competitors said, "No, we think having Vanguard and having Jack Brennan be the representative as chairman of this institute is good for us, all of us."

Let's talk about banks. How do you size them up as mutual fund manufacturers and distributors?

There's no question that for a lot of firms who do use third-party distribution, banks are a natural place to be. They have a physical presence, they have relationships. There are an awful lot of people for whom the bank is the trusted provider. (In) manufacturing, the difference between being a bank and being Putnam is going to be lost in the shuffle. It's a performance game.

Is scale important to banks with proprietary fund complexes?

Yeah, but performance and service is more important at the end of the day. It's hard to run a small complex. It's expensive. There are complexes that are saying, 'We're going to buy our way and create scale.'

It's not easy to do. When you look at the biggest players in this business-Fidelity, Vanguard, Capital Group, Putnam, Franklin, T. Rowe Price-none of them is younger than 50 years old. That tells you something about the consumer's view of trust and reputation. It's a tough market to crack into when you've got extremely tough competition at the high end of the business.

As banks become a bigger force in the mutual fund business, a lot of them want the Fed to have a greater regulatory role. Others want the SEC to be the lead agency. What's your view?

The Fed would be a mistake. There isn't a financial product that's worked as well as mutual funds, period, for the consumer. The investment business is a fiduciary business, it's not a safety-and-soundness business. That fiduciary standard is a critical part of what's allowed this industry to succeed through the years.

We went through the process a few years ago of, frankly, getting the states out of the hands-on regulatory business, and it was a great step forward. To put another entity in there would be a big mistake.

What do you think of mutual fund supermarkets, where investors can choose among thousands of funds?

I think the big issue is are they going to drive costs up. You see some of those fees and the fee increases that go on-eventually the consumer is going to say, 'Am I getting good value?'

If they don't deliver good value, they won't be successful in the long haul. And if they are shown to be a place where it's far too easy and too tempting to move money quickly, it's a problem.

Your opinion of wrap products?

They're generally far too highly priced. It's worth a fair fee to pay an adviser to give you the comfort that you're doing things well, to report to you, to highlight issues to you. But at 2% or 3%, it's just not worth it, by any means.

Going back to the ICI for a moment, your membership has grown from pure fund companies to include banks, brokerages, and insurers. Does that diversity make it hard to build consensus?

It's one of the big issues the ICI faces. We went through a long study about what the ICI should do and came back to very much saying we represent mutual funds. We don't want to broaden that mandate. We have had bank sponsors, brokerage sponsors, insurance sponsors on the executive committee and on the board of governors. So they are represented well, I hope.

What kinds of things are on your agenda?

One is clearly retirement initiatives. We see things like the (proposed) Roth 401(k) as very exciting, and we continue to think there aren't enough great savings and investment opportunities for the American public.

Our second big priority in the near term is ensuring that we all get through this year-2000 stuff, that's a high priority for us.

One of the great things that's happened is better and better disclosure initiatives. We think disclosure has been one of the keys to success and we'll continue to push that.

What about Social Security privatization? Shouldn't the ICI be jumping into that debate?

They've become a little more outspoken on Social Security reform. Privatization is a secondary issue versus fixing the actuarial issues.

It's not clear that this would be necessarily great business for mutual fund companies. There is not a lot of money; it could be transaction intensive; there are a whole bunch of issues associated with it.

But as this policy position has evolved, it has been driven by 'What is the right answer?' rather than by 'What would be most profitable?'

I've got to admit, I'm pretty proud of the way that's evolved.

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