Warren Buffet, in his widely anticipated annual letter to Berkshire Hathaway shareholders, blasts fund companies that cheated millions of investors through market timing and late trading, as well as directors who fell short of their duties.

Funds are in dire need of "truly independent directors" who are willing to fire investment managers who overcharge on fees or fail to put shareholder interests first, Buffet said in his report, which went out this weekend. CEOs of fund companies are grossly overpaid, he added, holding directors, themselves richly paid, to blame. Buffet also referred to the sale of Strong Funds, without naming the firm, as "a travesty."

The real "acid test" of whether current investigations into Wall Street and investment management firms will lead to meaningful change, Buffet said, is whether firms are willing to bring the pay scales of their chief executive officers back down in line with reality. "To date," Buffet wrote, "the results aren’t encouraging."

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.