If the U.S. mutual fund industry would like a clearer picture of what would happen to sales if fees—particularly up-front, sales load, 12b-1 or 401(k) fees—were disclosed, it need only take a look at the disastrous results in India.

Ever since India’s securities regulator eliminated up-front fees on mutual funds last August, advisers, brokers and even the post office, unwilling to impose a separate fee on investors, have virtually stopped selling the products, The Wall Street Journal reports.

The result has not only been a screeching halt to sales that had rocketed four-fold in the previous five years to reach nearly $150 billion in assets, but, in the case of equity mutual funds, which with an average 2.5% fee were the most expensive, they have been hit with sizeable outflows of $1.5 billion, or 4% of assets.

The Securities and Exchange Board of India decided to eliminate the “entry load” fees after a long debate on making them more transparent. “The move was driven by a single objective—investor protection,” said K.N. Vaidyanathan, executive director of SEBI.

India's Association of Mutual Funds has responded to the new rules with a national tour to educate investors on why they should be willing to compensate intermediaries by paying a fee, and the trade group is also pressuring the government to apply the same rule to India’s insurance industry.

U.S. Securities and Exchange Commission Chairman Mary Schapiro has vowed to revisit the controversial 12b-1 fee issue in 2010. The mutual fund industry has long defended the fees, whose use has expanded beyond their original sales and marketing intent to compensate and incentivize intermediaries.

While financial advisers and brokers who are rewarded by 12b-1 fees are in favor of them, the National Association of Personal Financial Advisors, a fee-only group, is not. “The purpose of these fees is to offset the marketing and distribution costs incurred by mutual fund companies,” said NAPFA Chairman William T. Baldwin. “However, when you peel back the layers, you see that some mutual fund companies are making a profit on 12b-1 fees. Fees associated with investments must be treated like an ‘open book’ that is easily understood by all potential investors.

“Without clearer disclosure, consumers may not be able to make the most educated decision possible,” Baldwin continued.

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