Trzcinka testifies before Congress; Mutual-fund fees under scrutiny by subcommittee on finance

Investors have a hard time determining how much they are paying in mutual-fund fees and have an even more difficult time determining what services they are getting for their fees, a UB economist testified this week before a congressional subcommittee investigating fees and price competition in the mutual-fund and bond markets.

"Some fees are hidden and many fees are charged in a complicated fashion," Charles Trzcinka, associate professor of finance and managerial economics, said in his prepared testimony delivered on Tuesday before the House Subcommittee on Finance and Hazardous Materials, which oversees the Securities and Exchange Commission (SEC).

"At best, the total fee can be estimated from the disclosure of most funds, but if an investor decides to estimate fees, it is very difficult to compare portfolios of risky securities. There are limitations in applying all measures of risk and there is a lack of uniformity in their application. Finally, the law interferes with the market for financial consultants," Trzcinka said.

"As a result of these difficulties, there is little pressure from investors to minimize fees. Disclosed fees have not changed much in this decade, but the task of determining how much a mutual fund costs has become more complicated. Hidden fees appear to have grown. It is clear...that the current mixture of fees has little relationship with the quality of the fund when 'quality' is defined as a better return for the risk taken. With this definition of quality, most economists view the competition in this market as imperfect and believe that the competition is not improving," he said.

Also testifying at the hearing were SEC Chairman Arthur Levitt; Michael Lipper, president of Lipper Analytical Service, and industry representatives. The hearing examined whether investors are getting their money's worth for fees paid on mutual funds, the impact of fees on mutual-fund performance and whether investors are provided adequate information about prices when considering investments in the bond market.

"When mutual funds are compared across broad classes of investments, the mutual-fund industry is spectacularly successful," Trzcinka told subcommittee members. "If competition is defined within the mutual-fund industry by comparing funds against each other, the story is very different."

Trzcinka's testimony noted a number of concerns about mutual-fund fees and competition:

- Total expenses paid by investors have not fallen over the past decade and probably have risen.

- There is no relationship between level of expense ratios and risk-adjusted performance except that large, expensive ratios substantially reduce performance.

- There is no evidence that managed mutual funds have performed better than funds that simply try to match an index or a combination of indices.

- There is little evidence of persistence of good performance; there is stronger evidence of persistence of poor performance.

- Information available to investors on mutual-fund portfolio management is poor.

Trzcinka, a nationally known expert on mutual-fund fees and performance, is author of the Forbes magazine Stock Market Course and an associate editor of the Journal of Corporate Finance and the Financial Review.