Mom-and-pop investors got a huge boost last week when those who manage public-employee retirement funds in California, New York and North Carolina threatened to pull their $400 billion in combined assets from mutual funds that won't clearly explain their fee structures and compensation agreements with other investment firms.
That kind of accountability has been sorely absent in the mutual fund industry, which grew from just $115 billion in assets in 1980 to more than $7 trillion at 2003's end. John C. Bogle, the Vanguard funds' founder who has long criticized the escalation of fees in the industry, reports that mutual fund assets under management grew by more than 60 times since 1980 -- but expenses and fees mushroomed by 90 times.
The caveat about "buyer beware" is in order, particularly at a time when ordinary investors spend hours online to find a $15 savings on a hotel room -- even while corporate fat cats toss around company cash on $6,000 shower curtains and Wall Street analysts act as cheerleaders for a profiteering elite.
But to be financially astute, investors need clearer information about where their money goes once that check to a mutual fund is written. The Securities and Exchange Commission last week proposed rules to force brokers, for example, to disclose hidden fees they get for hustling certain funds on investors. But a crafty lawyer can easily camouflage that information. Consider this prospectus waffle, which said a fund "may pay or sponsor informational meetings for dealers as described in the statement of additional information" but neglected to mention that investors foot the bill.
In spring 2003, the mutual fund trade association boasted that "trust is the principal reason our relationship with investors has not been broken by the bear market in equities of the past three years." Indeed, mutual funds had been the seemingly safe, convenient, park-the-cash-and-neglect-it investment alternative for millions. That was before New York Atty. Gen. Eliot Spitzer and the SEC launched their probes. Last week, the trade group praised the proposed SEC rules as "bold and far-reaching" -- just the thing to rekindle investor confidence.
SEC Chairman William H. Donaldson correctly argues that the free market, not regulators, should determine the appropriateness of fees and other charges by mutual funds. It's a key step that regulators now demand full disclosure. But if the industry fails to heed the growing demand to provide full, accurate and timely information, then regulators must act aggressively.