After scandals: a hard look at mutual-fund fees

True, the cost to each shareholder was in tens of dollars - not thousands, Fink points out.

But pocketing tiny slices of investor value can add up when so many shareholders are being taken. "Skimming" is the term used by Sen. Peter Fitzgerald (R) of Illinois, who has been chairing hearings on mutual funds.

Now the SEC is asking investors to comment on a proposal requiring broker-dealers "to disclose more information about costs and conflicts of interest to investors who purchase or sell interests in mutual funds."

Professor Freeman also wants more disclosure. "We need the mutual-fund industry to be put on a rigorous, detailed disclosure regime," he says. Every expense should be clearly defined so the information can be standardized and examined by academics, Wall Street analysts, and journalists. He also wants revenues and profits after expenses reported.

While in favor of "better disclosure," Fink may disagree with Freeman on important details of these reforms. But their key clash is over fund expenses and fees.

Freeman, together with Stewart Brown, a finance professor at Florida State University, produced a 2001 law journal article comparing the cost of portfolio management paid by pension plans with those of mutual funds. "Mutual-fund shareholders are being gouged," says Freeman.

The charge alarmed the industry, especially since Mr. Spitzer has been using Freeman's study, and the SEC has won huge fee reductions in relation to fund scandals.

Late last month, Putnam Investments announced it would cut fund fees by $35 million a year, hoping to stanch shareholder defections. Massachusetts Financial Services Co., a Boston neighbor of Putnam, agreed with regulators to cut fees by $125 million over five years. Alliance Capital Management Holding settled on a 20 percent management-fee reduction over the next five years, or about $350 million.

To Freeman, fund acceptance of such reductions offer some proof that fees are excessive. Alliance, he notes, charges its mutual funds a management fee of 0.93 percent of assets, while charging a Wyoming pension fund only 0.1 percent for "the same service."

Fink denies that the services provided to pension funds are the same. He charges that Freeman is making an unfair "apples-to-oranges comparison." He adds that Spitzer is basing his conclusions about excessive fees on "a grossly flawed methodology."

Freeman calculates that funds' advisory fees are still excessive by $9 billion, andthat the 12b-1 fees many funds charge are "a marketing boondoggle" that costs investors another $9 billion.

Fink replies that most 12b-1 fees justly reward brokers and others who sell shares to investors.

This battle is likely heat to up as the investigations continue - a good sign for small investors.

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