Amid scrutiny on fees and public and political outcry over inflated costs to investors, the Investment Company Institute issued a report on Wednesday stating that the average actual cost borne by stock mutual fund shareholders has plummeted 45% since 1980.
Equity fund shareholders paid an average of 1.25% in 2002, more than a full percentage point below the 2.26% paid, on average, in 1980. As for bond funds, investors paid 1.53% in 1980 and 0.88% in 2002. "The long-term downward trend in what it costs shareholders to invest in mutual funds is consistent and unmistakable," said Brian Reid, the ICIs deputy chief economist, in a statement.
ICI chief economist John Rea said that the study uses a methodology that incorporates both sales loads and annual fees and paints a more accurate picture of costs than some other studies that do not. Rea also pointed to a 2001 Securities and Exchange Commission study that warned of the dangers of arriving at misleading conclusions about fund fees without accounting for "significant changes" in the way sales charges are paid.
Specifically, the report states that shareholders rely on sales loads less frequently and more so on 12b-1 fees to pay for advice and service from brokers and advisers. Therefore, the increase in 12b-1 fees is often counteracted by a decrease in loads.
Another factor that is often overlooked, according to the report, is the benefit of economies of scale. The number of fund shareholders has increased 20-fold since 1980, the ICI reports. Along with that growth came the formation of many new fund companies and of funds themselves, many of which have stayed small. Smaller funds tend to have higher expense ratios, a fact that drives the industrys simple average fund expense ratio higher, the ICI said.
Reid said that there are several misconceptions in the fund industry concerning costs, one of which is that the simple average charge is the same as what the average investor pays. "The typical mutual fund investor pays much, much less in fund fees than the typical fund charges," Reid said in a statement.
"Shareholders pay much lower expenses than those charged by the average fund because shareholders are predominantly invested in lower-than-average-cost funds," the report states. Reid said that 60% of stock mutual fund shareholder assets are in funds with total expense ratios of less than 1%.
New York Attorney General Eliot Spitzer has repeatedly blasted the industry for price gouging fund shareholders with excessive advisory fees. Phone calls placed to Spitzers office seeking comment were not returned.
