Bogle on Fund Marketing: How Mutual Funds Sell You What You Don't Need
Book: Common Sense on Mutual Funds: Fully Updated 10th Anniversary Edition by John C. Bogle ISBN: 978-0-470-59748-4
Marshall McLuhan famously said “The Medium Is the Message.” Bogle flips that on its head for Chapter 16. In the mutual fund industry, the message is the medium. Marketing doesn’t just promote funds. Marketing shapes what funds actually become.
And that should make you uncomfortable.
A Business That Makes Whatever Sells
Here’s a line from the book that stops you cold: “We used to be a business that sells what it makes, but we’ve become a business that makes whatever sells.”
Think about what that means for a second. A healthy fund company would design an investment strategy, believe in it, and then tell people about it. But that’s not how it works anymore. Instead, fund companies look at what’s popular, create a product to match, and then sell it as hard as they can.
Tech stocks are hot? Here’s a tech fund. International emerging markets are the talk of the town? Here’s an emerging markets fund. Crypto is trending? You better believe there’s a crypto fund launching next week.
The problem is obvious. By the time something is popular enough to build a fund around, it’s usually already overpriced. So investors pile into a shiny new fund at exactly the wrong time, pay premium fees for the privilege, and then wonder why their returns are disappointing.
This is by design. Not for your benefit. For the fund company’s benefit.
12b-1 Fees: You’re Paying for Your Own Marketing
This might be the most absurd thing in the entire fund industry. And Bogle makes sure you know about it.
12b-1 fees are charges that mutual funds impose on their existing shareholders to pay for marketing and distribution. Read that again slowly. Your money, as a current investor in the fund, is being used to advertise the fund to attract new investors.
Why should you care if more people buy into your fund? Well, you shouldn’t. And in most cases, it actually hurts you. More assets flowing in can make the fund harder to manage. The new investors don’t improve your returns. But you’re subsidizing their recruitment.
It’s like paying for a restaurant’s billboard that brings in a bigger crowd, makes the kitchen slower, and raises your prices. Except you didn’t agree to it. It was buried in the fine print.
Billions of dollars flow through 12b-1 fees every year. Billions. All coming out of shareholder pockets. All going toward advertising that serves the fund company, not the fund holders.
From Owner to Customer
This is one of Bogle’s most important observations about how the industry changed. Mutual fund shareholders used to be treated as owners. Because technically, they are owners. You buy shares of a mutual fund, you own a piece of that fund.
But somewhere along the way, the industry stopped treating shareholders as owners and started treating them as customers. And there’s a huge difference.
An owner gets priority. Their interests come first. Decisions are made to benefit them. A customer gets sold to. Their attention is competed for. They’re a revenue source.
When you’re treated as a customer, the fund company’s job isn’t to maximize your returns. It’s to maximize how much money they can gather from you. The relationship shifts from stewardship to salesmanship. And that shift has real consequences for your wealth.
The Hype Machine
Bogle pulls no punches here. Funds are “hyped and hawked” with misleading performance claims. And it works, because most people don’t know how to see through it.
Here are some of the tricks. A fund company launches 10 new funds. Three years later, four of them have good track records by pure luck. Those four get massive advertising budgets. The other six quietly get merged into other funds or shut down. Nobody talks about them.
So all you see as an investor are ads for funds with great three-year returns. What you don’t see are the dead funds that failed. This is survivorship bias, and it makes the entire industry look much better than it actually is.
Or here’s another one. A fund advertises that it “beat the market” over the past year. But it loaded up on risky small-cap stocks during a year when small caps happened to outperform. The risk was enormous. Next year, those same bets could crater. But the ad doesn’t mention risk. Just returns.
The Broken Incentive Structure
And this is really what the chapter comes down to. The incentives in the fund industry are broken.
Fund companies make money based on assets under management. The more money they manage, the more fees they collect. So their primary goal is to gather assets. Not to deliver returns. Gathering assets.
And the best way to gather assets is marketing. Big ads. Flashy performance numbers. Celebrity endorsements. Sponsorships. All of that costs money. And all of that money comes from shareholder fees.
So here’s the cycle. Fund companies charge you fees. They use your fees to market the fund. Marketing brings in more assets. More assets mean more fee revenue. They use that revenue for more marketing. Around and around it goes.
At no point in this cycle does “deliver better returns to shareholders” show up as a priority. It’s not that fund companies are evil. It’s that their incentive structure naturally pushes them toward asset gathering instead of return generation.
And that’s why it matters. You can’t fix a broken incentive structure with good intentions. The structure itself has to change.
What You Can Do About It
Bogle’s advice is straightforward. Stop falling for the marketing. Look at expense ratios, not ads. Look at long-term track records, not last year’s performance. Avoid funds with 12b-1 fees. And be deeply skeptical of any fund that seems designed to capitalize on whatever’s trending.
The best fund for you is almost certainly boring. Low cost. Broadly diversified. Not particularly exciting. Not something you’d see a Super Bowl ad for.
But boring works. Over years and decades, boring compounds into real wealth. And exciting? Exciting mostly compounds into fees for someone else.
The medium isn’t the message. Your returns are the message. And everything else is noise.
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