Abstract

http://ssrn.com/abstract=923879
 
 

Citations (14)



 


 



Mutual Fund Advisory Fees: The Cost of Conflicts of Interest


John P. Freeman


University of South Carolina



Abstract:     
In the early 1970's, America's mutual fund industry was suffering net redemptions, meaning it was contracting in size. Fund marketing efforts were in disarray, thus prompting the Securities and Exchange Commission (SEC) to embark on a special study analyzing the problems then plaguing the industry. From that starting point, the SEC moved to loosen restrictions on fund marketing in order to foster a more competitive environment.

One consequence of this loosening was the explosive growth in mutual funds. Today's industry boasts more than 10,000 funds, with assets exceeding $7 trillion, an average annual asset growth rate since 1974 exceeding twenty percent. A consequence of this staggering growth is that fund sponsors, the SEC, fund investors, and the courts must now confront a new wave of challenges. Despite its phenomenal marketing success, the fund industry now finds aspects of its conduct under attack from various quarters. The popular press and a prominent regulator, Eliot Spitzer, are focusing attention on the industry's fee structure and the perceived inadequacy of mutual fund governance, including the gap between prices charged funds for advisory services versus prices fetched elsewhere in the economy for those same services.

This article examines whether the chief product that shareholders buy when they invest in mutual funds - professional investment advice - is being systematically over-priced by fund managers. The emphasis is on advisory fees imposed on equity mutual funds. Part II explains how the industry's unique management structure accounts for the alleged lack of price competition in the delivery of management advice perceived by the industry's detractors. Part III examines two questions related to economies of scale in the fund industry. First, do economies of scale exist for the delivery of investment management services to equity fund shareholders? Second, if so, are those economies being shared fairly with the funds' owners by the funds' agents, the investment advisors? Part IV studies causes for the status quo, including the industry's statutory scheme, the quality of the SEC's regulatory efforts, and the reception given fund critics by the courts. The Article concludes with a set of proposals for changing the present competitive environment in which fund advisory fees are set, disclosed, and evaluated.

Number of Pages in PDF File: 66

Keywords: Mutual fund, advisory fees, advisory services, pension fund fees, tiered structure, fund insdustry, shareholders, portfolio, Gartenbarg test, Section 36, Vanguard equity

JEL Classification: K00, K22

working papers series


Download This Paper

Date posted: August 13, 2006  

Suggested Citation

Freeman, John P., Mutual Fund Advisory Fees: The Cost of Conflicts of Interest. Available at SSRN: http://ssrn.com/abstract=923879 or http://dx.doi.org/10.2139/ssrn.923879

Contact Information

John P. Freeman (Contact Author)
University of South Carolina ( email )
349 Gambrell Hall
Columbia, SC 29208
United States
Feedback to SSRN


Paper statistics
Abstract Views: 2,548
Downloads: 571
Download Rank: 24,236
Citations:  14

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo2 in 0.578 seconds