The regulation of mutual funds is very much in the news. Not surprisingly, shareholders, fund managers, regulators, and, of course, politicians, are all weighing in with regard to the adequacy of current regulations. We contend that when it comes to reigning in abuses, no regulator can match the power of consumer sovereignty. Enforcement, ultimately, must come from millions of educated investors making rational decisions on their own behalf. To that end, this month’s issue is largely devoted to scrutinizing the hidden fees and questionable practices that pervade the mutual fund and the retirement plan industries.
We generally approach regulation with a healthy dose of skepticism. Mutual fund rules currently on the books, after all, were designed to address perceived problems that existed (ostensibly) some three decades ago. These rules (described in the following pages) have failed to keep pace with change in the capital markets. For example, as SEC Chairman Cox has pointed out, regulations that allowed for “12b-1” (marketing) fees were justified on the grounds that they would foster the growth of a then-nascent mutual fund industry. That argument is now defunct; mutual funds now outnumber common stocks and hold more than $10 trillion in assets. Similarly, “soft dollar” payments from brokers to fund managers were permitted largely as a compromise at a time when an antiquated system of fixed commissions was being abolished. As we document herein, both of these loopholes have since been grossly abused.
The SEC’s current appeal for greater transparency with respect to fees, however, appears sensible. We have often pointed out that while the past returns of a fund are generally a poor indication of future returns, the expenses they charge are an excellent indicator of the levies they will assess going forward. In other words, the returns of a security are beyond the control of investors and money managers alike. However, the fees that an investor opts to pay are completely within his control; it is imperative, therefore, that these levies are measured consistently and stated clearly. The SEC will always be “playing catch-up” to capital markets that are constantly innovating, but their quest to ensure that mutual funds make all of their costs explicit is quite reasonable.
We are always concerned that regulatory agencies, (the SEC, or the Department of Labor in the case of retirement plans) can create a false sense of security for investors who can become complacent simply because these entities exist. For individual investors, there is no substitute for conducting thorough due diligence before investing. Readers should take full advantage of the information that fund companies are required to publish (e.g. expense ratios). There are vast fee disparities among fees assessed by different mutual funds. The INVESTMENT GUIDE is designed to help confine your selections to include only those investment vehicles with cost-conscious managers who put the shareholder first.
Also In This Issue
New Retirement Plan Rules – Perils and Opportunities
The Hidden Costs Of Fund Investing
The High-Yield Dow Investment Strategy
The Dow Jones Industrials Ranked By Yield
Recent Market Statistics
To access the full article, please login or subscribe below.
Already a Subscriber?
Log in now
Get full access to the Investment Guide Monthly.Print + Digital Subscription – $59/Year
Includes 12 Print and Digital Issues
Print + Digital Subscription – $108/2 Years
Includes 24 Print and Digital Issues
Digital Subscription – $49/Year
Includes 12 Issues
Digital Subscription – $98/2 Years
Includes 24 Issues