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Summary of the Investment Company Institute's Response to the GAO Report on Mutual Fund Fees
The Report’s Most Important Finding Is That Mutual Fund Fees Have Declined.
- 85% of large equity funds reduced their fees during the nine years studied by GAO.
- The average fee reduction identified by the GAO was 20%.
- The GAO found that fund fees generally reflect economies of scale that result in lower fees.
- 89% of funds that experienced significant asset growth during the 1990s reduced their fees.
- The GAO’s findings are consistent with academic and ICI research on this subject.
The Report Also Found That the Mutual Fund Industry Is Highly Competitive.
- The mutual fund industry consists of more than 600 firms that compete aggressively.
- New companies can easily enter the mutual fund business: "barriers to entry" are low.
- Leading mutual fund firms have relatively small market shares; the industry is not concentrated.
- The GAO noted that funds compete for shareholders primarily on the basis of performance.1) Mutual fund performance must, by law, be reported after fees have been deducted.2) Thus competition based on net performance necessarily leads to competition based on fees and creates strong incentives to keep fees low.
- ICI research shows that price competition is working for the benefit of mutual fund shareholders:1) 78% of accounts are in equity funds that charge less than the industry average, and2) 86% of assets are in equity funds that charge less than the industry average.
- Bottom line: a typical equity fund investor pays 33% less than a typical fund charges.
Mutual Fund Directors Have Contributed to the Broad Fee Reductions the GAO Identified.
- Mutual fund directors are fiduciaries. They must always act on behalf of fund shareholders.
- The law also requires fund directors to consider carefully a range of factors when reviewing fees.
- Failure to consider all relevant factors when reviewing fees can lead to legal action.
- Fund advisory fees can only be increased when all three of the following actions are taken:1) a majority of all directors vote and recommend a fee level increase;2) a majority of all the independent directors vote to increase the fee level; and3) a majority of shareholders vote to approve the recommended fee level increase.
- Fund fee levels decline far more often than they rise, as the GAO Report demonstrates. One individual’s claim that directors have served to increase rather than decrease fund fees was offered without evidence or factual support. Yet the report confirms that fees have declined at a significant majority of funds, and that funds that have experienced the most significant growth have usually enjoyed the most dramatic fee reductions.
Mutual Fund Fee Disclosure Is Comprehensive and Understandable.
- The front of every fund prospectus contains an easy-to-read fee table. Recently updated as part of a comprehensive disclosure simplification effort by the SEC, the fee table provides the most information about fees available for any financial services product.
- Using the fee table, mutual fund shareholders can easily compare the costs of any and all competing mutual funds on an apples-to-apples basis.
- The GAO Report recommends additional disclosure be provided to shareholders somewhere on their account statements. The Institute will study this recommendation, but in doing so it is important to fully consider the possibility of unintended consequences, such as reduced use of the fee table, which could impede informed assessments of fund fee levels.
July 5, 2000