EDITORIAL: WELL-FED WATCHDOGS NEITHER BARK NOR BITE

With apologies to Winston S. Churchill, never in the field of investments have so many been paid so much to do so little as mutual fund trustees. The thought comes to mind after InvestmentNews published in its Jan. 26 issue a report that first appeared in sister publication Crain’s Chicago Business. An astounding $243,375 salary was paid in 1996 to Chicago lawyer Wayne W. Whalen for his work as a trustee of 92 Van Kampen American Capital mutual funds. And his pension will total a generous $600,000. (This on top of the fact that his law firm, Skadden Arps Slate Meagher & Flom, serves as Van Kampen’s outside corporate counsel.) Other Van Kampen American Capital trustees made similarly impressive coin, with 1996 pay of $104,875 and $138,500 for overseeing 55 and 37 funds, respectively.

Van Kampen can’t be singled out for criticism. The average 1996 salary for members of umbrella boards of fund companies with $30 billion or more in assets was $98,300, according to the newsletter Management Practice Bulletin. Leaving aside the issue of whether anyone can really exercise fiduciary responsibility over 37, 55 or 92 funds, this seems excessive compensation for what is, in the end, a mere part-time job.

Mr. Whalen and others say the work is complex, the responsibilities great. Sure. But spend some time talking with Robert A. G. Monks, chairman of Washington-based Lens, the gadfly firm that manages $100 million and campaigns against abuses in corporate governance. Mr. Monks used to be chairman of the Boston Co. He once headed the U.S. Department of Labor’s Pension and Welfare Benefits Administration. And he has served as a lawyer to mutual fund companies. If he could live his life over, Mr. Monks would come back as a mutual fund trustee. All the job requires, he says, is the ability to “read a lot of stuff, and say ‘yes.’ ”

Fund trustees are supposed to be watchdogs for shareholders, yet a well-fed watchdog is unlikely to bite the hand that feeds it. Recent research by Morningstar Inc. shows that
the higher the trustee pay, the higher the fund expenses. And fund expense ratios have continued increasing even as assets grow, though economies of scale should lower expenses per share.

The Securities and Exchange Commission has shown no interest in this issue, so it is up to the customers and their representatives to “effect change,” as they say in protest circles.

Financial advisers could direct their clients toward fund families with reasonable trustee pay scales. The result: more attentive trustees less beholden to management, lower administrative costs as the trustees listen to the marketplace and, ultimately, better net returns for the customers.

Maybe financial advisers can encourage the watchdogs to at least growl occasionally at those who are feeding them.