Firms Expected to Resist Pressure to Lower Fees
March 22, 2004
Will the growing number of settlements between disgraced fund companies and regulators put pressure on other fund advisors to slash fees, too? MFS, Putnam Investments, BoA and Alliance, the latter with a staggering 20% reduction over five years valued at a quarter of a billion dollars, have paved the way to what has become the industry's $64,000 question.
Actually, it's closer to a question of $35.2 billion, which is the total fee expense mutual fund investment advisors take in each year, according to Max Rottersman, president of FundExpenses.com, a New York research firm that tracks and analyzes fund costs for clients. This hefty figure includes $21 billion in advisory fees, $9.2 billion in 12b-1 and related marketing fees and $537 million in custodian fees.
If Alliance is willing to roll back its management fees, will other fund advisors follow suit, either as a competitive maneuver or to improve their standing among investors? The number of mutual funds lowering fund-management fees is proliferating, according to some industry analysts, and as the mutual fund scandal continues to unfold, they expect this trend to spread (see MME 3/8/04). Fund complexes that have recently lowered fees include Chase Investment Counsel Corp. of Charlottesville, Va., Robert W. Baird & Co. of Milwaukee, Pioneer Investment Management of Boston and Oppenheimer Funds of New York.
Other industry watchers say, don't hold your breath. While New York Attorney General Eliot Spitzer has vowed to continue to target oversized funds, industry insiders don't expect advisors to voluntarily race to cut their funds' profit margins. Perhaps only under regulatory scrutiny or directive will advisors have a change of heart, they say.
Not surprisingly, mutual fund executives are playing their cards close to the vest. For one thing, as a practical matter, fund management is loath to reduce management fees. If they do, they have to obtain shareholder approval before hiking them again at any point in the future. It's far more palatable for funds to reduce costs, including management fees, by waiving a portion of their fees for a specified period of time, or capping their total expense ratios, and absorbing excess costs.
Whether contractually obligated, or volunteered, once the specified fee-waiver expires, fund executives can automatically revert to previous fees without legally obtaining shareholder approval through proxy votes.
While some fund companies might succumb to an initial rush to lower fund fees, don't expect this to be a lasting trend, Rottersman said. As soon as Spitzer has given up on this issue, the industry will revert back to its asset-gathering, fee-generating ways, he said. "Whenever Spitzer feels that he has plumbed this fee issue enough, then he" and the rest of the industry will forget about it, Rottersman said.
Firms that over the course of the recent bear market have lost money and seen their profit margins shrink as much as 30% are still highly profitable, said Ralph Verni, a consultant in Sudbury, Mass., and former president and CEO of State Street Research asset management of Boston.
"The fund industry is the only industry where a commodity product with performance that varies from good to poor hasn't seen a change in prices," Verni said. That said, however, Verni does believe that the institutional practice of negotiating fees might creep over into the retail fund area.
For his part, Phil Edwards, managing director of fund research at Standard & Poor's, said that Alliance's unusually high fees, and pricey settlement, is not indicative of the rest of the industry. "I am not sure mutual fund houses will embrace lower fees," he said. However, if Congress does succeed in passing a new law to make fund fees more transparent, the good old law of supply and demand will force fund companies to offer more competitive prices (see MME 12/8/03).
"If you make fees more transparent and data easily available," Edwards noted, "the market will regulate fees, and we won't have to have someone like Spitzer do it."
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