Some funds lowering fees to settle scandals

By Allan Drury
(Westchester, N.Y.) Journal News

The price that the mutual fund industry is paying for its scandals may lower fees for the nation's 95 million fund investors.

One large fund company, Alliance Capital Management Holding LP, has agreed to reduce its fees by $350 million over the next five years to settle allegations it allowed improper trades for favored, wealthy investors.

The Alliance settlement and similar ones that may follow will cause investors to look harder at the fees they pay companies for handling their money, said Edward O'Neal, an assistant professor of finance at Wake Forest University in Winston-Salem, N.C.

"One of the problems historically has been that investors have really not paid a whole lot of attention to fees," O'Neal said. "They primarily are concerned with past performance. Some of that emphasis really has been misplaced."

He said the rising popularity of index funds in the past decade shows investors were becoming more fee-conscious even before the scandals.

Index funds invest in companies in major stock indexes such as the S&P 500 or the Dow Jones industrials. Managing them requires less research, so fees are lower.

Data from Morningstar Inc. shows the average mutual fund carries a fee of 1.44 percent. Before the reduction, Alliance charged an average of 1.75 percent for its funds, making it one of the most expensive. The Vanguard Group's average fee is just above 0.25 percent, making it one of the lowest.

New York State Attorney General Eliot Spitzer, who negotiated the fee settlement with Alliance, told a U.S. Senate committee in November that Americans paid $70 billion in mutual fund fees in 2002, or an average of $737 per investor.