| BUSINESSWEEK ONLINE : AUGUST 16, 1999 ISSUE | ||||||||
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| BUSINESSWEEK INVESTOR -- THE BARKER PORTFOLIO
High Fund Fees Have Got to Go Vast economies of scale benefit fund companies, not investors. Although 75% of my net worth is in mutual funds, I'm still offended by how many funds resist one simple improvement: lower prices. Like campaign finance, high fund fees have grown into a huge wart that's plain to see yet seemingly impossible to remove. It all became uglier to me recently as I looked into the Investment Company Institute's new set of ''best practices'' for fund directors. The industry group started work on these guidelines after the Securities & Exchange Commission hosted a special meeting in February on how boards oversee mutual funds. To guard investors' interests, the law demands that every fund's board include some members who are independent of the fund company. But these independent directors have failed, and you can see it in how little fund prices have fallen. Since 1984, Morningstar reports, the average cost of actively run no-load U.S. stock funds fell less than 10%, even as their assets multiplied 32 times. Vast economies of scale benefited mutual-fund companies, not investors. Now comes the industry's list of ''best practices'' for fund directors. Issued on July 7, the 15 items look good. For example, while the law sets 40% as the minimum proportion of independent directors on a board, the best practices call for at least 67%. They also urge the independents to get their own lawyers and insurance, along with a lengthy list of other ways to be more effective. All are welcome. But don't expect to get richer at the expense of the fund sellers. That's because boards overseeing much of the money in mutual funds already follow most or all of these practices. How do I know? I asked each of the ICI's top 10 companies, holders of 46% of the industry's assets, which best practices they now use. I then tallied the results and scored each company, except Morgan Stanley Dean Witter. It did not detail its policies. The others? Six of the nine scored 92% or more (table). Had I not taken off points for even minor deficiencies, more would have scored 100%. All would have been above 90%. ONEROUS CHARGE. The trouble turns up in the table's next column. It shows Morningstar's estimate of each firm's annual revenue from so-called ''12b-1'' marketing fees, perhaps the most onerous fund charge. The total take for these 10 firms: $3.3 billion. In 1980, the total for all funds was zero. That year, after a long run of poor returns and shrinking funds, the industry persuaded the SEC to allow it to take money from investors in the form of 12b-1 fees to pay for marketing costs. The theory: Bringing new money into the funds would help them rebuild assets, and with economies of scale, fees would fall. Assets since then have grown like mad. Yet 12b-1 fees persist. Independent directors must vote annually to extend them, and a frequent rationale is that they support brokers who offer ongoing service to investors. True, I suppose. Yet paying a 12b-1 fee strikes me as similar to sending Ford an extra couple hundred bucks a year so that it can keep its dealers and I'll have a familiar place to get my tires rotated. That's why I hope the SEC, now at work on its own reforms, ups and kills 12b-1 fees. For investors, it would end one way they get clipped. For the independent directors, it would start a job they should be doing themselves. Questions? Comments? E-mail barkerportfolio@businessweek.com or fax (407) 728-1711 By ROBERT BARKER To read a letter to the editor about this story, click here. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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