The Investment Company Institute claims the cost of investing in mutual funds continued to decline between 1998 and 2001, the most recent years numbers were available.

Experts say that the ICI data, while accurate, does not take into account other factors that may suggest that fees are rising.

Generally, a fund's expenses can include a load, a 12b-1 fee and an annual fee, inclusive of management, trading, legal and custodial fees.

The ICI says fees for equity mutual funds declined by about 5% in the four years ended in 2001, continuing a trend that has resulted in a 43% decrease in costs for investing in funds since 1980. In addition, the trade group said that distribution fees for equity funds declined 23% during the three-year period, largely because of an increase in the sale of no-load funds during those years.

But Gary Gensler, a former Under Secretary of the U.S. Treasury, said that those numbers don't account for all of the costs when it comes to fund fees. He suggested that the ICI, acting as a responsible trade group, has put forward specific data designed to make the business look good. "What they've said is accurate, but it's just not the complete picture," Gensler said.

To be sure, getting a perfect picture of fund costs is a daunting task. At least one leading fund research firm, Lipper, of New York, has taken a close inspection of one type of fee, management charges. However, no group has a clear idea of the cost of certain fees, such as those charged by financial advisers.

And it appears that several different methods for crunching the numbers prevail.

"It's all a question of methodology," said Jeff Keil, Lipper VP, global fiduciary review.

For example, the ICI said that for $10,000 invested in an equity mutual fund, a shareholder's total cost declined from $135 to $128, to 1.28% today. The ICI said it arrived at that number by amortizing load charges over a period of years.

4.1% Loads, 1% Trading Costs

As Gensler sees it, that is significant since only half of all funds now charge such fees, largely because of a sea change in the industry where fund complexes are now targeting brokers and financial advisers, who charge separate fees of their own.

Gensler concludes that loads cost an investor an average of 4.1%, or $410 for a $10,000 account. In addition, Gensler said that the ICI has also ignored trading costs. The Securities and Exchange Commission does not require funds to disclose such data, he said, yet the average equity fund manager's turnover ratio is 80% each year and 100% for 15 months. Trading costs add another 0.5% to 1%, Gensler said. Thus, as he tallies the numbers, the average cost for investing in an equity was 3% -- more than double the ICI's figure of 1.28%.

The ICI responds that it never intended to include trading costs in the research because the study's purpose was to examine the annual cost of buying mutual fund shares, said Brian Reid, ICI senior economist. "The ICI's reputation hinges upon producing high-quality data," he added.

Economies of Scale

Whether the methodology is right or wrong to include trading costs, other factors muddy the question of whether fees are declining. Edward O'Neal, an assistant professor of finance at Wake Forest University's Babcock Graduate School of Management in Winston-Salem N.C., said that the ICI's most recent numbers primarily cover the bull market, a time when assets under management were on the rise. Today, with assets dwindling, poorer economies of scale at some complexes might compell them to drive fees up, he noted.

Indeed, a Lipper study projects that management fees for mutual funds are on the rise. Many funds use what Lipper calls a breakpoint, which ensures that management fees decrease as assets increase. But Lipper said the economies of scale concept works both ways. Although Lipper does not have hard numbers to prove this at this time, Keil is certain the numbers would bear out his theory.

"I can tell you that for a fact," Keil said.

Furthermore, O'Neal said that when regulators began allowing 12b-1 fees in 1980 to help them increase their economies of scale by covering marketing and distributions costs - to attract more assets - fund companies suddenly had two ways to charge investors for distribution: 12b-1 fees and loads. And they took advantage of both of them, he said. However a researcher figures those fees into a cost calculation can have broad effects, O'Neal said.

Still, O'Neal estimated that only 20% to 30% of investors are savvy to these kinds of details. While some are clearly cognizant of the issue, such as the masses who invest in low-fee index funds of Vanguard of Valley Forge, Pa., most investors continue to follow the industry's lead in emphasizing performance, and they look to follow the money, he said.

"Performance sells and that's what [gets] promoted," O'Neal said.

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