The problem is that fewer than 20 percent of the mutual funds in the industry employ sub-advisors. The other 80 percent of funds in the industry still pay affiliated management companies an inflated fee for investment advice. Those fees, which are not negotiated at arms-length, are significantly higher than the fees charged by sub-advisors. It is unfortunate that the ICI report focused on only a small corner of the industry and did not address the dominant mechanism by which fees are set and services are delivered.
The ICI report is also misleading in another important respect. It focuses on the fees that the sub-advisors charge the mutual fund managers, but ignores the fact that the managers often tack on a "premium" or "monitoring fee" to the sub-advisors' charge. In other words, the sub-advisor may charge the manager 31 basis points for investment advice, but by the manager adds a "premium" before passing the charge along to the investor.
The result is that the managers have once again pocketed a savings that truly belongs to the investors. An unbiased study would have used the net cost to investors in sub-advised funds. The failure to do so is another example of the ICI ignoring the interests mutual funds investors in favor of an industry that has cheated them.
A fair reading of the ICI report therefore supports my office's conclusion that the advisory fees charged to mutual fund investors are too high. It also supports the conclusion that we need to fix the governance and structural imbalances that favor management at the expense of investors and that led to the fee overcharges.
Finally, it is apparent from the ICI report that the only way for fees to be fair is to require that they be negotiated at arms-length and that mutual fund directors establish the fairness of the fee contracts they approve. That is not yet happening in most of the industry, and our investigations are therefore continuing.
