Industry innovator and low-cost investing pioneer John Bogle.

To sum it up, Bogle says, "The (mutual fund) industry is headed in the wrong direction."

Perhaps the most disturbing change Bogle has seen during the five decades since he wrote his senior thesis on mutual funds at Princeton University is what he describes as a transformation of the mutual fund industry "from a profession of investment management to a business of marketing."

Evidence of the movement abounds, according to Bogle, who notes that the failure rate of mutual funds, which once stood at about 14 percent, has skyrocketed to 55 percent in recent years, and that fund fees are going through the roof, when they should be declining. Portfolio turnover has increased at an alarming rate: the average stock holding period has gone from six years to just 11 months. And shareholder holding periods have declined from the equivalent of about 16 years to 2 1/2 years. What all of this adds up to, Bogle says, is the difference between long-term investing and short-term speculation.

"The industry needs to return to its professional roots," Bogle said. "We need to move away from offering what's hot to doing what's best for investors."

Since his retirement as chairman of The Vanguard Group in December of 1999, Bogle has been busy concentrating on industry affairs, writing, speaking, and conducting industry research as the President of the Bogle Financial Markets Research Center. McGraw-Hill published his third book, "John Bogle on Investing: The First 50 Years," last fall.

In other words, "I'm doing the exact same thing I was doing before," Bogle said during a phone interview with a humble, matter-of-fact style that characterized much of the discussion. At another point in the conversation, reflecting on a career that has revolutionized the way people invest and has won him numerous industry honors, Bogle declares, "I feel like it's worked out pretty well."

In spite of all that is wrong with the industry, the picture isn't entirely grim. Bogle praised a move by the Securities and Exchange Commission earlier this month aimed at strengthening mutual fund directors' ability to protect investors. The SEC adopted several new rules affecting mutual fund governance. Among the provisions were changes that require that independent fund directors be nominated by other independent directors, and that any legal counsel for the fund's independent directors be independent.

The moves are a step in the right direction, according to Bogle, who added, "I would've gone a step further and said that the board chairman ought to be an independent director, rather than the head of the management company." And, if Bogle had his way, no more than one member of management would be a member of the fund's board of directors.

But the best catalyst for change may have come from the markets themselves: The sky-high ride known as the NASDAQ came to a crashing halt.

"The burst bubble of the NASDAQ won't be forgotten in the next generation," according to Bogle, who calls the NASDAQ's plummet "a big lesson that will help bring us to the right path."

"The industry can't think its way out of the market decline," he said. "Shareholders will vote with their feet."

Overall, Bogle says, the long-term prospects for the industry look good. After all, he asks, "Where else are investors going to go? In bonds and money market funds, high expenses stand out like a sore thumb, and in equities, even if a manager does well, in the long run, costs are the differentiator."

"As investors come to expect low costs, they'll demand it in mutual funds," he added. "I think we'll come back to a norm where portfolio turnover will return to decent levels and investors will get funds at reasonable prices."

While Bogle says he doesn't know how to fix the industry, he offered to share some of the lessons he's learned: The economics of investing are terrific; the emotions of investing are murder; all managers lose -- they cannot and do not beat the market; and of course, costs matter.

-- By Melissa Klein

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