Reforms After The Mess
Saturday, January 29, 2005Lipper Senior Research Analyst Don Cassidy on KKZN AM-760; Thursday, January 29
TRANSCRIPT:
Q. In this funds-trading scandal since September 3, there has been a lot of news about WHO did wrong and how much wrong, and now we are seeing some of the monetary settlements -- but what REFORMS will come out of this, do you think?
A. Four main areas, really... fee reductions for future years repayments for the actual measurable losses to investors in the funds new rules that will restrict behavior in the future additional disclosures in fund documents
Q. Let's look at each of those, Don...
A. Sure. As part of the settlements that Alliance reached and looks like MFS will take, advisory fees are being reduced for 5 years by 20% by the offending companies. This is HUGE money that will stay in fund holders' accounts. I believe other companies will be forced to accept similar structures. THEN, there will be pressure in the industry for even the innocent fund companies to reduce their fees so they are not "above the average" for their kinds of funds.
Q. And the repayments?
A. These are going to be figured by the lawyers and accountants and auditors and computers. For an average fund holder, they might be in the order of maybe $10 per account. It will take time to figure out, and you will get either a check, or a credit to your fund account. Probably in a few more months. If you left a fund, send them your old account number and new address!
Q. And the new rules?
A. These could be sweeping, and will affect investors as well as insiders. There will probably be new rules on advisors' employees trading in their own funds, either a ban or a lengthy minimum holding period. Lots of new internal reports and controls. There will almost certainly be a STRICT cutoff of 4PM eastern time for all fund orders to be in the hands of THE FUND COMPANY (no excuses), and maybe even a little earlier. There will probably be some sort of mandatory short-term redemption fee, probably about 2%, but what the holding period involved will be is still a bit fuzzy. Minimum 5 days, maybe longer.
Q. and MORE DISCLOSURE??
A. Yes, for whatever it is worth... The SEC and Congress have always assumed that whatever a fund document discloses is actually read. I don't think that is reality, but I'm sure they will impose some new disclosures. I HOPE they will force certain information to be stated as RATIOS or PERCENTS, and will not allow the information to be hidden in the Statement of Additional Information or the Proxy Statement, but will force it to the front couple of pages of the Annual Report (not just the Prospectus, which existing holders do not read the fresh versions of).
Q. Any examples of that?
A. Absolutely! This 'Shareholder Dollar Churn Rate' that we coined, which is redemptions in dollars divided by average net assets (ANA -- size of the fund) should be up front just like the portfolio manager's turnover rate. And I think it is time to make commission dollars be shown as a percent of assets, just as all expenses are. I would propose a new combined ratio, too, that is expenses PLUS commissions in a percentage form. In all too many cases, there are funds whose commissions exceed their "total expense ratio" and the average person has no idea where to find the data and how to compute the ratio.
Q. How long will it take?
A. We are talking about Washington DC, here! And this is an election year, so there will be posturing and plenty of camera time before things get done. I would say most of 2004. Part will be done by the SEC as new rules (and THAT could take into 2005 due to their review/comment process), and part will be done by Congress, before the elections if I had to make a guess.
Q. How will it actually HELP investors?
A. Well, beyond the repayments, which will be proportional to actual losses.... fee reductions obviously will help all investors whose funds cut fees. Publicizing commissions costs may put pressure on free-trading funds to lower those, and may direct smart investors' money into lower-commission-spending funds.
Q. Will all investors be equally helped?
A. I would not say so... except for the repayments, benefits will flow to investors who take the time to read the documents and go onto the websites and LEARN which funds are doing what. If you are passive, you will possibly stay stuck with, or even make news buys into, badly behaving and expensive funds. No one will spoon feed you the best answers! Just as with buying a car, you get paid via savings IF you do your own homework!
Q. How will the money-mgmt industry be affected longer term?
A. If fee reductions spread and stick, it could be a major blow to profits at money management firms! Even the innocent ones may be forced to reduce their prices (fee rates) to avoid being labeled as above-average. Mr. Spitzer will not be a popular figure with stockholders of money management companies down the road!
Q. Any competitive advantages/disadvantages for certain firms?
A. Definitely! All the new regulatory requirements will require staffs of people who are not money managers. They will be a much more serious "overhead" burden to smaller fund companies. Smaller companies will need to merge, become sub-advisors to larger companies who can spread the new overhead, or go out of business over time. The ironic bottom line is that in trying to encourage fee competition, the regulators will put some of the smaller guys out of business and thus REDUCE investor choice.
