Sunday, October 29, 2006

"Shop" Talk

This past weekend was Parent’s Weekend at the college where my eldest has now been in residence for the last two months. We’d had a great weekend, but as we went to check out of the hotel, I noticed that the final charges were considerably more than the rate we had been quoted when we made our reservations. Setting aside for the moment concerns that my 14-year-old had discovered the wonders of pay-per-view, closer scrutiny yielded the number I had anticipated—our room charge. But also included in the charges I was now expected to pay were a room tax, a city tax, and an occupancy sales tax.

I suppose one could hardly fault the hotel for those additional charges – they had, after all, provided the room and facilities to my family for the agreed upon rate. I’ll bet that somewhere on their Web site, or perhaps even on the form I signed at registration, the existence of these additional taxes was acknowledged. However, I’m reasonably certain that the hotel was happy to have me think I was getting the base rate when making my booking decision. And, when all was said and done, I’m assuming that comparable hotels in the vicinity had comparable (if not identical) taxes.

In a similar fashion, mutual fund investors have no doubt become a bit desensitized to the disclosure of fees. We talk about investment management fees as a proxy for what we are paying for the actual management of money, but at the same time realize that there are other charges, such as 12b-1s, that go to cover certain required administrative costs of running and maintaining the fund. And, for the most part, we assume that most funds that have comparable administrative structures also have comparable cost structures. We may even assume, as I did with my hotel bill, that those costs aren’t even fees, but simply a recovery of costs.

Well, disclosure isn’t necessarily clarity, and last week we were reminded that there frequently is more than meets the eye even with so-called disclosure. The latest “disclosure,” of course, is the revelations slowly emerging from an SEC investigation into the business practices of some fund company administrators in dealing with the fund complexes (for more details, see here). While in most respects, it may not be as monetarily significant, or perhaps not quite as pernicious as the mutual fund trading scandal, it is, nevertheless, one more not-so-shining example of what greed, coupled with an “excess” of funds available to fuel those vices, can yield.

For years, retirement plan investors have been willing to fork over billions of dollars in fees to the mutual fund industry. In turn, we have benefited from professional money management, call-center support, 24/7 access to our accounts via the Internet, the flexibility of daily valuation, the convenience of daily liquidity, and, in many cases, the support of financial professionals to help guide us in the management of our retirement savings accounts. Many of those services have been funded, in whole or significant part, by so-called revenue-sharing arrangements. However, IMHO, many of these mutual fund complexes have either forgotten—or have chosen to deliberately ignore—their obligation to the investing public.

I, for one, am sick and tired of having to fork over redemption fees self-righteously imposed by firms that not so long ago saw fit to profit richly from illicit and profitable arrangements they deliberately struck. I’m weary of 12b-1 fees ostensibly imposed to benefit investors with lower fees resulting from broader fund distributions—but that somehow never seem to achieve that result no matter how broad that dissemination. I’m tired of the oligopolistic mentality that sets a “fair” fee based on whatever the plurality of similarly situated mutual funds already get away with; I’m disgusted with the insidious development of special share classes designed to cloak retail pricing in what appears to be an institutional wrapper, and the sense that investors shouldn’t be troubled with a full, transparent disclosure not only as to how much money is being taken from their accounts, but to what ends, and what parties, it is being directed.

Normally, of course, we don’t seek to delve deep into the product profitability of every dollar we spend. I may have qualms about oil company profitability as I fill my tank—and I may well wonder at the expense of a bag of popcorn at the local cinema—but ultimately, as a consumer, if I believe I am being taken advantage of, I shop somewhere else. A mechanic that appears to gouge me on a simple repair will lose my business forever; a roofer, after repeated attempts to remedy a leaky roof, may gain my ire and a call to the Better Business Bureau.

In recent times, the investment industry has conducted itself in such a way as to not only jeopardize the trust of the investing public, but to suggest that it doesn’t really “get” what the big deal is. Maybe if we started shopping somewhere else, they would.

- Nevin Adams

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