Pressure mounts for reductions in shareholder fees

Mutual funds

September 14, 1997|By BLOOMBERG NEWS

BOSTON -- U.S. mutual fund managers are facing increased pressure to do something they've avoided for years -- lower the fees they charge shareholders.

A survey of industry leaders by Los Angeles-based Marketing Matrix Inc. found that most fund executives expect shareholder fees to decline between now and the year 2000.

If so, it would be a departure for a $4 trillion industry that isn't known for reducing the fees it charges customers. The Marketing Matrix survey found that fund managers don't like to lower fees because it hurts profits, but they will have to begin dropping them if they want to compete effectively for investor dollars.

"Fund group leaders see that they need to lower expenses to remain competitive and be responsive to what investors want," said Marcia Selz, Marketing Matrix's president.

At least one industry leader thinks it will be a while longer before rivals get the message. John Bogle, the founder of Vanguard Group, America's second-biggest fund company, doesn't expect fees to fall until fund boards pressure managers to lower fees.

"Fees are much higher than they ought to be, and they'll stay that way until directors do something about it," Bogle said.

Currently, the average management fee and operating expenses for diversified U.S. stock funds total $14.20 per $1,000 invested, according to Morningstar Inc., a Chicago-based industry research group. That's exactly what funds charged in 1991 when the industry was just one quarter the size.

It's a statistic that runs contrary to conventional business reason that holds companies, especially those in highly competitive industries, are better off passing along at least some of their economies of scale to customers or shareholders in the form of lower fees. Lower mutual fund fees are good for investors because they lead to higher returns.

Several factors are at work that will result in a reduction in shareholder fees over the next several years, said Edward Boudreau, chairman and chief executive of Boston-based John Hancock Funds. They include a more educated investor and a change in the way financial advisers are paid, he said.

Investors are becoming more aware of the fees when they buy funds and they will begin to concentrate more of their assets in funds that charge lower fees, Boudreau said. This will force companies to become more aware of fees.

Meanwhile, financial advisers who are responsible for selling funds are seeing a change in the way they get paid, Boudreau said. Before, financial advisers received a fee for each transaction they performed. Now, increasing numbers of financial advisers are paid based on the assets they manage, which means they aren't making as many trades and fees are coming down.

Another factor that might result in lower fees would be a sudden decline in the U.S. stock market. If returns stagnate, fund companies will have a tough time justifying the fees they now charge.

"Right now there's little pressure on fund companies to lower fees because returns are high and funds are selling," said John Re- kenthaler, investment strategist at John Nuveen Co. in Chicago. "That would probably change if stocks fall."

Morty Schaja, chief operating officer of New York-based Baron Capital Inc., agreed. "If we get into an environment where stock market returns are 5 percent to 7 percent a year, there will be a lot more pressure to lower fees because a 20 basis point difference in fees can help or hurt returns."

Some fund executives say they're always looking at the fees they charge and they do want to reduce them, but it's not that easy.

"Our fees do come down as we attract assets, but it's extraordinarily expensive managing funds, especially if you're a smaller fund group competing for shelf space against industry giants like Fidelity and Vanguard," said Stephen Doyle, chief executive of San Francisco-based Montgomery Asset Management.

Some funds reduce fees because of lagging relative performance rather than because of asset growth.

Fidelity, for instance, reduced the management fee for its flagship Magellan Fund twice in the past year because the fund's returns lagged behind the Standard & Poor's 500 Index in the recent three-year period. Boston-based Fidelity said the average management fee for Magellan was $4.50 for each $1,000 invested in the 12-month period ended March 31, down from an average $7.30 per $1,000 invested in the prior 12-month period.

Fee reductions for poor performance aren't what investors want. They want good performing funds with lower fees, and that's what they'll expect increasingly in the future.

Pub Date: 9/14/97

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