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House Subcommittee Hearing Examines Price Competition in the Mutual Fund Industry
Washington, DC, September 30, 1998 - On September 29, the House Commerce Subcommittee on Finance and Hazardous Materials held a hearing on "Improving Price Competition in Mutual Funds and Bonds." Testifying before the subcommittee on mutual fund issues, in addition to the Institute, were:
Arthur Levitt, Chairman, Securities and Exchange Commission
William McNabb, Managing Director, The Vanguard Group
Michael Lipper, Chairman, Lipper Analytical Services
Charles Trzcinka, Professor, State University of New York, Buffalo
Harold Evensky, Certified Financial Planner, Evensky, Brown, Katz & Levitt
David Gardner, Co-Founder, The Motley Fool
Opening Statements by Subcommittee Members
Commerce Committee Chairman Thomas Bliley (R-VA) began his statement by saying the hearing should try to answer the question of whether investors understand the fees they pay when investing in mutual funds, despite the pricing information that is made available to them. He asked the panel to consider "if customizing investors’ quarterly statements to show exactly what was paid in fees is beneficial." Subcommittee Chairman Michael Oxley (R-OH) asked the panelists to consider whether the average mutual fund investor knows how much of his or her money goes to fees and whether competition in the industry is sufficiently strong to protect consumers. He specifically challenged the fund industry to come up with ways to improve investor understanding of fees. Representative Edward Markey (D-MA) characterized the hearing as a checkup for a generally healthy patient. He emphasized the success of the industry and the absence of major scandal—a factor he contrasted at length with the current problems facing hedge funds. He added that "while there is substantial information available to investors regarding mutual fund fees and charges, more can be done to educate the public about such costs, promote comparison shopping by consumers, and facilitate competition in the industry to lower costs and fees."
Institute President Matthew P. Fink delivered the Institute’s testimony. He stated that the evidence is strong and compelling that competition is working in the interests of investors. Mutual funds fiercely compete to attract and earn the loyalty of investors. Indeed, mutual funds compete on many levels, including performance, investment philosophy, experience, specialized expertise, and service. His statement continued, "And let there be no doubt in anyone’s mind—mutual funds compete vigorously based on price."
The testimony emphasized the following key points:
Competition is working. More than three-quarters of all equity fund investor accounts are in lower-cost funds—funds that charge less than the industry average. The average equity fund investor pays 36 percent less than the average fund charges. In fact, the mutual fund industry provides a near textbook example of a competitive market structure due to the number of competitors, stringent government regulation, clear disclosure, low barriers to entry, and heavy scrutiny by the media.
Disclosure is working. SEC regulations require that fees be prominently disclosed in a standardized, easy-to-use table at the front of each fund prospectus. No other financial product is subject to such comprehensive fee disclosure rules nor provides such understandable information.
Regulation is working. The Investment Company Act of 1940 protects investors by prescribing how a mutual fund must conduct business, including limits and special procedures relating to fees. Forbes magazine once called this law "one of the world’s most perfect legal documents."
Economies of scale are shared with fund investors. Directors at many mutual fund companies implement policies that automatically reduce management fee rates when assets grow to a certain level. One report estimated that 75 percent of all funds have such plans in place. It is important to note, however, that although the industry has grown, this does not necessarily mean that economies of scale will be realized across the board. Economies are realized at the individual fund level.
In addition, the statement stressed the importance of a quantum increase in investor education. The Institute applauded recent efforts of the SEC, particularly the national investor awareness campaign. But the statement adds, "Although we are gratified that so many investors appear to be developing the appropriate sensitivity to fees as an element of informed investing, it hardly means our job is complete. The challenge of educating investors—about fees and the other important elements of mutual fund investing—is a continuing responsibility. But just as there is no magic pill that will produce instant good health, there is no magic regulation that will produce instant investor awareness... We stand ready to consider measures that promise to improve investor awareness, including the understanding of fees."