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SEC Makes Recommendations On 'Excessive' Mutual Fund Fees

Mike Godfrey, Tax-news.com, New York

26 January 2001

In a recent SEC report, the Commission revealed that mutual fund fees paid by investors have risen almost 20% over the last 20 years, and called for the fund companies to disclose to their US investors exactly how much they are paying out each quarter, not in percentages, but in dollar amounts.

Nancy M. Smith, head of investor education at Foliofn.com, which is an internet investing service that competes with mutual funds says: 'It's clear from our experience that people are just astounded at the amount they are paying to own a mutual fund. It's usually a twofold eye-opener: how much they pay and how much that is compounded over time.' This recommendation (which may, according to the report, become a requirement at some point in the future) would enable investors to compare a fund's fees alongside other key information.

However, quite apart from being hidden, critics of mutual funds also complain that the fund advisory fees are far too high, and indeed, the legal standard (based on the 1982 landmark decision Gartenberg v. Merrill Lynch Asset Management) presently used to determine whether this is the case is more than a little vague:

'To be found excessive, the trustee's fee must be so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's length bargaining.'

Unsurprisingly, the industry has responded angrily to the SEC report. John Collins, spokesman for the industry trade association ICI (Investment Company Institute) recently argued that ' Mutual funds have unmatched disclosure of their fees. It's unmatched by any other financial product.' Mutual fund supporters justify the rise and rise of charges as being due to the overwhelming popularity of equity funds, whose fees are relatively higher than those charged by the bond funds favoured in the seventies and eighties.

Be that as it may, it appears that the SEC has set its sights on the US mutual fund sector, and will continue to press for reformed disclosure procedures and examination of the fee structure in general. Be prepared for much wailing, gnashing of teeth, and beating of breast before this one is settled..!

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