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| Visions & Revisions |
Mutual Antipathy
Debra Ryono
07/01/2004
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Additional disclosure of transaction costs, commissions and fees will reduce
opportunities for fraud.
Congress should require that funds include portfolio transaction costs in
a total expense ratio. It also should require that the dollar amount of expenses
paid by a shareholder be disclosed in the shareholder’s periodic statement, and
that fees of similarly managed funds and appropriate index funds be disclosed in
the prospectus for cost comparison. Although the expense ratio is appropriate
for providing comparability across different funds, it does not pack the same
import as a dollar amount. Providing investors with the amount in dollars that
they actually spent will give concrete form to an indefinite concept. However,
the SEC has accepted industry arguments not to require dollar costs because
individual figures are too expensive. Instead, it has decided to require
disclosure of the hypothetical fees paid on a $1,000 account in the shareholder
report. It is still not being an advocate for investors.
The SEC has itself
stated that fund fees “can have a dramatic effect on an investor’s return. A 1
percent annual fee, for example, will reduce an ending account balance by 18
percent on an investment held for 20 years.”Further, mutual fund
shareholders should be entitled to receive the same information as other
investors in securities in the form of full disclosure of their brokers’
compensation or fund transaction confirmations. Such disclosure also should show
how breakpoints are applied, as well as any special compensation received by
brokers for selling particular funds. When buying a house, purchasers are
provided with an estimate of their total closing costs before making a final
decision. However, fund shareholders do not even receive a final statement of
their actual costs, much less an up-front estimate of such costs. The SEC has
proposed to require brokers to provide, both at the point of sale and in the
transaction confirmation, disclosure of the costs and conflicts of interest that
arise from the distribution of mutual fund shares. Fund Democracy, along with
other consumer groups, has filed comments with the commission generally
supporting its proposal.
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