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Fund Firm Negotiated Lower Trading Costs

Capital Group says brokerages agreed to cut commissions by a third. Investors benefited.

January 15, 2005|Josh Friedman | Times Staff Writer

Capital Group Cos., the Los Angeles-based firm that runs American Funds, negotiated lower stock-trading commissions from brokerages last year as expenditures throughout the U.S. mutual fund industry came under more scrutiny, the company said Friday.

The move cut expenses that are borne by investors in American Funds.

Capital Group spokesman Chuck Freadhoff said the commission costs were lowered by roughly one-third in 2004, but he declined to disclose the dollar amount.

Large mutual funds are constantly moving stocks within their portfolios, forcing them to pay millions of dollars in trading commissions to the major Wall Street brokerages.

Trading costs are not disclosed as part of a fund's so-called expense ratio, but they nonetheless add to operating expenses. That trims returns for investors -- and has raised the eyebrows of regulators overseeing the $7.9-trillion fund industry.

The move by American Funds, made in late January and early February 2004, was first reported Friday by the Financial Times newspaper.

In all, investors in stock mutual funds pay $17.3 billion a year in "hidden" trading costs that are not reported in official expense ratios, according to a recent study commissioned by the Zero Alpha Group of financial planners.

The study found that expense ratios understate the cost of running a fund by an average of about 44%.

The move by Capital Group was not related to the revenue-sharing deals it has maintained with the brokerages that sell its funds.

Brokerage Edward Jones & Co. reported Thursday that it received a total of $82.4 million in revenue sharing -- or incentives paid on top of regular commissions and fees -- during the first 11 months of last year from seven firms on its list of "preferred" fund families. American Funds paid $27.2 million, or one-third, of that total.

As industry expenses have drawn heightened scrutiny in the last year, several fund firms have changed how they do business with brokerages.

Fidelity Investments, Janus Capital Group Inc. and MFS Investment Management have scaled back what are known as soft-dollar arrangements, which involve paying extra stock-trading commissions to cover the cost of research material that the brokerages provide from other sources, such as Bloomberg News market data.

"The industry may clean itself up even before the Securities and Exchange Commission acts," said Roy Weitz, editor of the website in Tarzana.

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