America's Stock-Fund Owners Pay Twice the Fees of Institutions
2003-11-17 03:53 (New York)
Nov. 17 (Bloomberg) -- Americans who own stock mutual
funds are charged annual management fees of about $18 billion,
twice the amount they should be paying according to data shared
by state and federal regulators investigating the industry.
Individuals pay $56 in fees for every $10,000 in equity
mutual funds, double the $28 paid by institutional investors in
stock funds, said John Freeman, a professor at the University
of South Carolina and one of the principle sources of data on
mutual funds for New York State Attorney General Eliot Spitzer.
Mutual funds ``charge whatever they can get away with and
nobody has been stopping them,'' Freeman said in an interview
from his office in Columbia, South Carolina.
Individuals should be paying similar levels of fees as
institutional investors, according to Spitzer, who initiated
the investigation of the $7 trillion mutual-fund industry in
September. Spitzer alleges improper short-term trading of
mutual funds helped push up costs for America's 84 million
owners of stock funds, whose investments are worth $3.2
trillion according to the Investment Company Institute. An
absence of transparency on fees has helped disguise the extent
of the wrongdoing, Spitzer said.
``Many funds have abandoned the interests of
shareholders,'' Spitzer said in a statement to Bloomberg News.
Stock, bond and money market mutual funds have more assets
than the $5.9 trillion in public and private pension funds
combined, and the amount of work involved in overseeing the
different accounts is similar, making it impossible to justify
the fee differential, Spitzer said.
Criticism of SEC
On Nov. 13, Spitzer criticized the Securities and Exchange
Commission's partial settlement in its inquiry of Putnam
Investments because it didn't require the company to admit
guilt. It also didn't address fees charged by equity mutual
funds, which were mostly introduced during the bull market of
the late 1990s when commissions were overshadowed by 24 percent
annual returns of the Standard & Poor's 500 Index.
Boston-based Putnam has been charging individual owners of
its International Capital Opportunities mutual fund $91 per
$10,000 invested. The state of Massachusetts was asked to pay
$27 per $10,000 invested in international stocks.
``Lowering fees is inevitable,'' said William Patterson, a
director of investment at the AFL-CIO, which represents 65
labor unions with 13.2 million members. ``This is all to the
good. This is an industry which had a pass for many years.''
The SEC, along with Spitzer and other state regulators, is
examining whether returns for long-term investors have been
reduced by improper short-term and after-hours trading by
privileged clients. Companies being probed include Putnam, New
York-based Alliance Capital Management Holding LP, Strong
Capital Management Inc. of Menomonee Falls, Wisconsin, and
Denver's Janus Capital Group Inc.
Disclosures of improper trading have led to the firing or
suspension of more than 40 employees at companies including
Bank of America Corp. and Prudential Securities Inc., and the
ousting of senior executives such as Lawrence Lasser, who
oversaw Putnam for 18 years. Alliance asked for the resignation
of John Carifa, the firm's president for 10 years, for
overseeing a unit that engaged in inappropriate trading. On
Nov. 13, Gary Pilgrim and Harold Baxter, who co-founded Pilgrim
Baxter & Associates Ltd. in 1982, were forced to step down.
So far, there's little evidence of investors abandoning
stock funds. An estimated $5.4 billion per week poured into
equity funds in the four-week period ended Nov. 12, a survey by
AMG Data Services of Arcata, California, said. The pace of
inflows was the fastest since May 2001, following a 19 percent
increase in the S&P 500 Index this year.
Lawmakers including Democratic Senators Jon Corzine and
Christopher Dodd, and Republican Senator Peter Fitzgerald and
Representative Richard Baker, are pushing for legislation
requiring fund companies to more clearly disclose the
commissions that they charge.
``If you really look at the fee structure of the industry,
you'll see that the fees are very high,'' Fitzgerald said at a
Senate subcommittee hearing on Nov. 3. ``We need to fix that.''
Fund companies respond that management fees they charge
include more services, like sending reports to shareholders,
than those charged for pension-fund management.
``The advisory fee includes a bundle of services so you
can't separate out the portfolio management fee that pension
funds pay,'' said John Rea, chief economist at the Investment
Company Institute in Washington, the mutual-fund industry's
Commissions charged by the 25 biggest mutual fund managers
showed that Pittsburgh-based Federated Investors Inc. has among
the highest fees, collecting an average $83 for every $10,000
in its equity mutual funds, according to data compiled by
Bloomberg. Mellon Financial Corp.'s Dreyfus Funds demands $80.
Average stock fund costs aren't ``particularly
meaningful,'' Federated spokeswoman Meghan McAndrew said.
Investors use other factors to pick funds, including analysis
of long-term performance, a money manager's reputation and how
a particular fund fits into an overall portfolio, she said.
The average management fee at Amvescap's Aim Investments
unit is about 0.75 percent of assets invested because a
majority of the firm's stock funds invest in international,
``small-cap,'' and industry-specific parts of the market such
as gold and health-care companies, said spokesman Ivy McLemore.
``The research demands on the fund company are more
strenuous and labor intensive because many of the companies in
the funds' portfolios aren't universally followed by Wall
Street analysts,'' McLemore said.
Vanguard Group of Valley Forge, Pennsylvania, charges the
lowest stock fund fees among the 25 biggest companies -- $27
per $10,000 invested, according to Bloomberg data. The
management company is owned by shareholders, unlike most of its
competitors, allowing for lower expenses, said Michael Miller,
managing director for planning and development at Vanguard.
``Small differences in the fees charged can add up to
enormous differences in returns over time,'' Fitzgerald, a
senator from Illinois, told reporters on Nov. 3. ``A basis
point here, a basis point there, may not sound like much, but
when it's multiplied by someone's entire life savings and then
compounded over 10, 20, or 30 years it can add up to an
enormous difference. Investors need to spend some time to try
to search out the lowest-cost, best-managed funds.''
Fitzgerald said lawmakers may draw up legislation to limit
mutual-fund fees. ``We haven't fully thought that through,'' he
said. ``It's something that we've got to consider.''
A proposal from Spitzer that mutual funds put clauses in
contracts with advisory and management companies to prevent the
managers from charging fees above those charged to pension
funds would make ``a whole lot of sense, Fitzgerald said.
``If investors feel the game is rigged, they will avoid
the playing field and park their money on the sidelines,'' said
Baker, a representative from Louisiana, in testimony to a
Senate subcommittee on Nov. 3.
--Aaron Pressman in the Boston newsroom at (1) (617) 338-5822
or apressman@Bloomberg.net, with reporting by Amy Strahan
Butler in Washington, Philip Boroff and Margaret Popper in New
York, Richard Craig in Princeton, and Matthew Keenan and Edward
Baeb in Boston. Editors: Quinson, Roussel, Urban.