Funds Expected to Pass Along Compliance Costs

In a new study, FRC predicts new SEC regulations will lead to a major shakeup for the mutual fund industry
A new study by Boston-based Financial Research Corp. indicates that some mutual fund companies could pass on the costs of new regulations prompted by far-reaching investment scandals by increasing shareholder expenses up to $125 per year, Dow Jones Newswires reports.
According to the study, which surveyed marketing officials at roughly 20 investment firms, mutual fund companies are on the cusp of providing more transparency into previously opaque practices, such as revenue sharing and marketing fees, also known as 12b-1 fees.
Pressure from industry regulators, most notably the Securities and Exchange Commission, on mutual fund companies to lower management fees is also expected to exact a toll on future profits. If the proposed management fee reductions are adopted, experts predict that profits at mutual fund companies could plummet by 4.5% to 15.6%.
In the event that these guidelines become standard operating procedures, mutual fund companies are likely to retaliate by flooding the market with more lucrative types of products, such as separately managed accounts and closed-end funds.
The study's authors also noted that discount brokerage services are moving in the direction of becoming an endangered species but the practice of using soft dollars to purchase research is likely to continue into the distant future.
In addition, the study predicts that the regulatory changes have prompted brokerage firms to reevaluate the profitability of proprietary mutual fund families and in some cases consider disengaging management and distribution or jettisoning these subsidiaries altogether.