Mutual Fund Deregulation – No way!
May 28, 2007 1:43 pm
On May 27, 2007 – Chuck Jaffee of Marketwatch writes about a book that proposes changes for the Mutual Fund Industry. He comments, “The mutual fund business is the proverbial camel, the one that was supposed to be a horse until it was built by committee. It is filled with arcane rules and procedures that can make funds perform more like beasts of burden than thoroughbreds. And while investors have worked their way over the hump and have successfully used mutual funds to reach their financial goals, it’s hard not to wonder how the business could be improved.”
The idea came from the book “Competitive Equity: A Better Way to Organize Mutual Funds“. Mr. Jaffee says that, “it made such a compelling story for investors. The book, co-authored by Peter Wallison and Robert Litan, calls for deregulation of the mutual fund industry. I wrote to Mr. Jaffee and he replied that it is best if I were to speak directly to the authors. (Maybe I will)
The basis of this idea seems to be to throw out the Board of Directors of the mutual fund and replace them with Trustees. One of the components to this would be to attempt to stop the requirement of fee oversight by the board and put it in the hands of the fund’s management. The idea is said to help bring on more competition and therefore greater benefit for the fund investors. (Fox and hen house ring any bell?)
There are many problems with this thesis. To keep this post short, we should focus on the most obvious: The fund industry is already very competitive. It is no longer the 1960’s when there were few funds and most has high fees that hurt their already awful performance. Today, John Bogle of Vanguard fame brought about a wave of competition when he created index funds with fees of only 1/5 of 1% annually. How much more can fees go down? What are these authors thinking? If investors want lower fees, let them a fund that is cheaper. No one is requiring anyone from investing in a fund with 2, 3 or 4% fees. It is the same argument that we have heard (and I agree with) over and over again. IF YOU DO NOT LIKE THE TV CHANNEL, CHANGE IT!
Moreover, the industry has had competition that has grown exponentially over the years. For one, ETFs have taken a big chunk out of fund assets. Then there are the hedge funds, not to mention the ease that companies like Schwab, eTrade and Fidelity have mad it for individuals to invest in stocks. In fact, in an article only a few hours later, Marketwatch published an article titled Race to the bottom, Vanguard’s new international ETFs put fees in focus and pressure rivals. HELLO! Is anyone managing the content over there!
So what is all the hoohaa about? If it is really fees-then we need to revisit the our understanding that there are choices. If it is a concern about transparency, well then we have something to talk about. The fact is that the archaic disclosure requirements for funds has to be updated. Not to long ago, Regulation FD tried to provide a better level of shareholder/investor insight. But it is still far from perfected. To see this is action, just go and try to find a recent listing of a fund’s holdings. At best you will have something a few months old. What good does that do anyone?
On the other had, why should a fund disclose their holdings and their strategies. Isn’t that what you are paying them to do anyway? Secret recipes are there to protect the integrity of the product. This is no different..
The last item that needs to be addressed is the fact that funds are paying for inclusion in platforms such as Schwab, Fidelity and Ameritrade. These costs are embedded to help with distribution expenses and can be looked at as a convenience fee. Otherwise, investors would have have a hard time with consolidating their portfolio(s). Ultimately organization would be a nightmare.
So, tell me again why we want to deregulate…..It can not be the Consumer Reports research that said, “Our research concluded that while consumers have made some gains under deregulation, on balance they’ve lost ground. Service has typically deteriorated. Consumer rights have sometimes suffered. Claimed price cuts are often not all they seem. And when free markets have gone bad, deregulated industries have seen no contradiction in getting multibillion-dollar government bailouts,” (Associate Editor at CR – 2002 Link to Full Article .pdf )
Deregulation may benefit some sectors, but not when it comes to MY MONEY. Oversight is necessary and as long as the fund performs, I am willing to pay the extra .25% that this horrible regulation requires. Make sense?