Fee, Fi, Fo, Fum

David Guarino, communications manager at Standard & Poor’s, says that while S&P is not examining 12b-1 fees with an eye toward taking any action, “we opened some eyes with our research.” Reaction among fund companies, he points out, has been a declaration that 12b-1 fees are justified because “the funds remain open to existing investors, and [the funds] service brokers who sell those funds; the 12b-1 is a broker fee as well.” The thing is, he adds, “investors just haven’t been looking at expenses that closely, and fund companies need to be clearer in disclosure of the fees they’re sharing, how they allocate them, and where the money is going.”

One way to remedy the problem, he suggests, is that prospectuses could list fees as dollar figures rather than percentages–how much would be charged on an investment of $10,000, perhaps–so that investors can get a better idea of how much they’ll actually be paying on their investment, as well as really understand what the prospectus is saying. Guarino says that such a plan has been proposed by SEC chairman William Donaldson. “Funds with lower-than-average expense ratios,” he reminds, “have outperformed their peers on a one-, five-, and ten-year basis.”