It's a man-bites-dog story. In a world awash in stories about abusive mutual funds, a fund company is doing the right thing by its shareholders by cutting some fees. Voluntarily. Without being sued (or even threatened) by New York Attorney General Eliot L. Spitzer or the SEC or anyone.
I'm talking about Selected Funds, best known for its Selected American Shares stock fund. Selected is a throwback: Its board takes its obligations to shareholders seriously; its manager uses words like "stewardship" to describe his role. "Managing money may not be the highest calling, but we don't have to make it the lowest calling," says Chris Davis of Davis Advisors, which runs the funds.
I discovered the cut, which Selected hasn't publicized, by accident: I've owned Selected for years, and started reading its newest prospectus one night because I couldn't fall asleep and prospectuses are snooze-inducers. But as I began to realize what was going on, I became so engaged that insomnia won, hands down.
Here's the deal. Fund supermarkets run by Fidelity and Schwab have become huge mutual fund players. These two supermarkets hold a total of almost $600 billion of assets, including around 60 percent of Selected American's $6.3 billion of shares. These supermarkets provide one-stop shopping for investors, letting them pick and choose among dozens or hundreds of funds. They're tremendously convenient -- and, seemingly, free.
But there's no such thing as a free lunch -- or a free supermarket. Fund management companies have to pay Fidelity and Schwab for supermarket shelf space -- investors don't get a bill, but fund companies try to build the cost into their fee structures. So investors pay indirectly. Investors who don't use supermarkets or other intermediaries pay the same fees, in effect subsidizing other shareholders.
Selected, which sells both through intermediaries and directly, has thrown down the gauntlet. It has created a lower-cost share class for investors who buy directly from Selected and own at least $10,000 of shares.
Eligible holders can convert to the new Class D (for direct) shares, which don't carry the 0.25 percent annual distribution fee that Selected has collected from all its investors for years. Existing shares became Class S (for supermarket) on May 1, and continue to carry the distribution fee. The difference: $25 a year on a $10,000 investment, reducing the cost of owning Selected American to around $69 from the current $94.
Selected wants to automatically switch eligible holders to D shares unless they opt out, but says it's waiting for the SEC to approve the paperwork. I guess no one quite knows how to expedite selective, voluntary fee cuts. Selected's directors and the Davises say they won't convert any of their families' shares to D until other holders have plenty of time to convert. Pretty classy of them not to move to the head of the line.
"Fund supermarkets provide a very valuable service to shareholders, but if you're not getting it, why should you pay for it?" asks Selected board chairman Jim McMonagle, explaining why the board decided to create D shares. Why, indeed?
McMonagle, a Cleveland lawyer, says that more than $800 million worth of Selected American's shares are eligible for the reduction. If all eligible holders convert -- as one of my children already has -- it will cost Davis Advisors more than $2 million a year in fees that it now collects from them, and gets to keep. No problemo, says Chris Davis: "It's not appropriate for us to charge people for services we don't provide."
This all sounds too corny to be true, but the Selected board, God bless it, has a history of feistiness. In 1993, it actually took the fund management contract away from Kemper and gave it to Davis, a family firm now in its third generation of money-managing.
Selected, to my way of thinking, is doing things right. It's letting customers decide whether to pay more to get the convenience of a supermarket, as I do at Schwab with some of my family's complicated accounts, or to get less-convenient service at a lesser cost, as I do with less-complicated family accounts.
Fidelity and Selected have made a tentative deal that strikes me as perfectly fair. The deal works because it lets Fidelity customers pick what kind of service they want. They can buy or sell the more-expensive Selected S shares in the no-transaction-fee part of Fidelity's supermarket, FundsNetwork. Or they can buy the cheaper, $10,000-minimum-investment D shares and pay a one-time transaction charge. Fido gets much less from Selected for transaction-fee customers than for FundsNetwork customers.
But Schwab, which calls itself the small investor's friend, has done the wrong thing. Like Fidelity, it will let investors ante up $10,000 plus a fee to buy shares. But unlike Fidelity, it won't let its customers buy S shares (except for holders reinvesting their dividends). Unless Schwab changes its mind, Selected American's business at Schwab will shrink drastically.
I think Schwab, which raised its fees last year, wants to make an example of Selected American to forestall rebellion by other funds. Schwab spokesman Greg Gable says Schwab is acting only to protect its customers. Gable says Schwab allows only the lowest-cost share classes into its supermarket to stop fund companies from creating more-expensive supermarket shares. Selected, though, is doing the opposite: creating cheaper non-supermarket shares.
After a week of sparring with me, Gable hinted that Schwab may revisit Selected American. "In a case where a fund is lowering its fees," he said, "we have to find an approach that helps our clients get access to the lowest cost, without disadvantaging anyone or creating a confusing mess of different share classes. We're looking at that very carefully."
Let's hope Schwab looks carefully enough to do the right thing by offering what Fidelity does: a clear choice, and clear information about how much things costs. And let's also hope that other funds follow Selected's lead and cut fees without someone having to hold a gun to their heads.
Writing stories about this won't be as much fun as exposing evildoers. But as you can see, even a hard case like me can find good news to be exceptionally uplifting.
Sloan is Newsweek's Wall Street editor. His e-mail address is email@example.com.