EDITORIAL: SHEDDING SOME LIGHT ON MUTUAL FUNGUS

The Securities and Exchange Commission has turned its spotlight on the mutual fund supermarkets. That’s an excellent idea. One focus should be the fees charged to fund families by the supermarkets for so-called shelf space – a payment for the opportunity to be included among the financial mart’s many offerings. The SEC must not allow the industry to treat mutual fund shareholders like mushrooms on this issue, keeping them in the dark and feeding them manure.

No one is suggesting the fees are illegal. And supermarkets certainly have been popular among investors and their advisers who appreciate the one-stop convenience and record-keeping efficiency. But the charges – usually around 35 basis points, picked up by the fund company – may be too high.

Who pays those fees? Every mutual fund investor who buys a share in a fund family marketed through a supermarket, whether or not the investor buys through the supermarket. By increasing a fund company’s expenses, the charges inevitably reduce the investor’s realized return.

What does the investor not buying through the supermarket get? Nothing.

Oh, perhaps someone will argue that the broader distribution brought by the supermarkets allows economies of scale that force down overall administrative charges for all investors. It’s hard to answer that with a straight face. Besides, any such economies are unlikely to offset the shelf-space charges. The non-supermarket investor still is bearing cost for no gain.

The best result from any SEC examination of the supermarket charges would be greater disclosure of all charges.

When investors can see exactly what fees they are paying – and what those fees are used for – they can decide for themselves whether to invest in funds marketed through supermarkets. They may well decide it’s worth the cost. Or they might campaign for lowering those fees.

Throwing more light on the many ways revenue is generated in the mutual fund business would end the shareholder-as-mushroom effect and would stimulate healthier growt
h of that industry, as well as of the financial planning industry.

Markets are rarely perfectly efficient, but the more information is available, the more likely markets are to approach efficiency by allowing the consumer to make informed, rational decisions. In an efficient market, the fittest fund companies and fund sellers will survive. The others will pass. And that’s the way it should be.