Exorbitant trading fees targeted by Spitzer

Excess fees called worse than late trading, timing

December 04, 2003|By Ritu Kalra | Ritu Kalra,NEWSDAY

NEW YORK - State Attorney General Eliot Spitzer said yesterday that he is broadening the focus of his investigation into the mutual fund industry to include excessive fees managers charge regular investors.

"Fees, fees, fees" are the next issue, said Spitzer during a speech in Manhattan before attorneys and investment bankers who were guests of the Japan Society. "Exorbitant fees have swamped, by many multiples, the harm imposed by late trading and market timing."

Industry experts said yesterday that many of the fees associated with running a mutual fund are legitimate. But in raising the issue, Spitzer criticized the industry for failing to disclose fees fully and allowing large investors to pay less than small shareholders.

For regular investors, mutual fund fees can be difficult to track. In most cases, fees are disclosed as a percentage of assets in the fund, called the expense ratio.

The ratio is not translated into dollars so that investors can clearly see the fees they've paid. Nor do the ratios have to include all expenses. This allows hidden fees and charges to slip through the cracks without investors' knowledge.

In previous testimony before Congress, Spitzer noted that fees add up, giving as an example the possibility that someone who invested $100,000 in a fund could lose as much as $6,000 over 10 years because of excessive advisory fees. And in a $7.1 trillion industry, "we're talking big, big money," Spitzer said.

The Investment Company Institute rebuts the allegation that small investors pay too much for portfolio management services. Economies of scale mean that larger funds have smaller expenses as a percentage of their total assets, said institute spokesman Chris Wloszczyna.

Still, Spitzer and other regulators see fees as their next big area of concern. Among the hidden and extra costs:

Trading costs: Funds fail to fully disclose commissions paid to brokerage firms on each trade of stock bought or sold for the fund.

Soft dollars: Fund companies pay extra commissions of "soft dollars" to brokerage firms in exchange for research and computer services. Shareholders cover the cost.

Shelf space: Shareholders also cover the cost of their managers paying brokerage firms to sell and market their funds.

"The middlemen are charging the fund companies for access to the customers, and then turning around and charging the customers for access to the funds," said Russel Kinnel of Morningstar Inc., adding that shareholders are paying at both ends.

Excessive loads: Individuals who invest more than $25,000 or $50,000 in mutual funds are often entitled to discounts on loads, a form of upfront commissions. But a recent study by the National Association of Securities Dealers concluded that in one of five cases, brokerage firms did not pass on the savings to individual investors.

Funds have also come under fire for failing to forgo charging fees to investors who switch funds.

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