OXFORD, Miss. The mutual fund fee bill is in the mail. And it should include the hidden costs of mutual funds, which are so significant that in some cases they are several times greater than the funds stated expense ratio.
That was the consensus from the majority of panelists on The Mutual Fund Summit here Saturday, where 11 lawmakers, regulators and industry leaders, including ICI Chairman Paul Haaga, gathered, just a day after the Zero Alpha Group released a report showing that brokerage commissions average 27 basis points.
The debate over mutual fund fees has become almost as heated as the debate over taxes, said summit panelist Don Phillips, managing director of Morningstar. "But at least with taxes, you get a bill," Phillips said.
"If everyones charging an unreasonable amount, they all look reasonable," added Barbara Roper, director of investor protection, Consumer Federation of America, in calling for more meaningful fee transparency.
SEC Commissioner Harvey J. Goldschmid, SEC Director of the Division of Investment Management Paul Roye, House Financial Services Senior Counsel Linda Dallas Rich and Vanguard founder Jack Bogle were among those who gathered in the Deep South. The meeting was held under the auspices of Fund Democracy founder Mercer Bullard, a professor of law at the University of Mississippi.
Zero Alpha Report
Meanwhile, in a Friday teleconference, Zero Alpha revealed that hidden costs stem from trading costs both from brokerage commissions and implicit bid-ask spreads.
"The study shows that for the typical fund, portfolio transaction costs, [including] commissions and spread costs, equal 43% of the funds expense ratio. That means for every dollar you know you spend on fund costs, another 43 cents is hidden from you," Bullard said.
"Even more shocking is that in many cases, portfolio transaction costs can be 400% or more of the expense ratio. In other words, for every dollar you pay, four dollars or more is not disclosed," Bullard continued.
Jeff Buckner, president of high-net-worth registered investment advisor Plancorp, also speaking on the call, said that the unstated, hidden costs, can be a major drag on performance. "I have a hard time imagining any other product, financial or otherwise, where consumers would sit still for such a huge chunk of the costs being hidden," he said.
Moderating the session Friday for Zero Alpha, a nationwide network of eight independent investment advisory firms, were Edward O'Neal, assistant professor of finance at the Wake Forest University Babcock Graduate School of Management, and Jason Karceski and Miles Livingston at the University of Florida.
Commenting on how important it is for fund companies to share the right, the honest fee figures with shareholders, Bullard commented: "An ounce of data can be worth a pound of policy."