Americans who own U.S. stock mutual funds are paying about 6 percent less in annual management fees than they did before New York Attorney General Eliot L. Spitzer began his assault on industry-wide trading abuses.
Today, holders of actively run U.S. stock funds overseen by the 100 biggest fund companies pay an average $9.80 for every $1,000 invested, down from $10.40 two years ago, according to data compiled by Chicago-based Morningstar Inc.
The reduction, which amounts to about $1.5 billion of savings, followed Spitzer's 2003 probe and an investor migration to lower-cost funds.
"The whole world is listening, thanks in very large part to Eliot Spitzer, who deserves some sort of medal of honor from the mutual fund investor," said John Bogle, founder of the Vanguard Group of mutual funds and a longtime critic of the fees companies charge.
Spitzer shocked the $8.5 trillion industry in 2003 when he accused four companies, including Bank of America Corp. and Janus Capital Group Inc., of permitting short-term trading that hurt long-term investors.
His subsequent investigations, and those by the U.S. Securities and Exchange Commission and other regulators, turned up repeated instances of rapid buying and selling of fund shares, often with the approval of fund executives. The probes also uncovered illegal late trades, in which investor orders were submitted and processed after the 4 p.m. market close to take advantage of market-moving events.
Spitzer used the scandal as a platform for consumer protection and said fees were "grossly out of control," almost double the fees paid to investment companies by pension funds. He pledged that all of his settlements with fund firms would include management price cuts, and he eventually won about $925 million in concessions.
"It was great that he went after fees," said Mercer E. Bullard, a law professor at the University of Mississippi at Oxford and head of the nonprofit shareholder advocacy group Fund Democracy. "I have no doubt that at the margins, those settlements placed downward pressure on fees."
The Morningstar study focused on actively managed, diversified U.S. stock funds, a category that excludes index, sector and asset-allocation funds. It compared total fees paid by investors in those funds in 2003 with costs averaged over the past year. The fees include investment management, marketing, administrative and other expenses.
The study looked at average costs, based on the rates set by companies, as well as so-called asset-weighted costs, which take into account which funds consumers actually invested in.
Americans had about $2.4 trillion invested in diversified U.S. stock funds managed by the 100 largest companies on July 31, Morningstar said. Had investors paid the same rates as in 2003, their annual fees for these funds would have been $25.4 billion. Instead, their costs were about $23.9 billion, based on data from Morningstar's study.
New York's TIAA-CREF had the industry's cheapest rates, according to Morningstar, charging total fees averaging 0.33 percent, or $3.30 per $1,000 invested. Dimensional Fund Advisors, based in Los Angeles, had the second-lowest fees at 0.34 percent, or $3.40 per $1,000 invested. Vanguard's average rates were third at 0.37 percent, or $3.70.
Calamos Asset Management Inc. of Naperville, Ill., had the costliest rates in the Morningstar study, at 2.01 percent, or $20.10 per $1,000 invested. Gamco Investors Inc., a Rye, N.Y., company formerly known as Gabelli Asset Management Inc., had the second-highest rates, at 1.99 percent, or $19.90 per $1,000 invested.
Alliance Capital Management Holding LP, the first company to settle with Spitzer, agreed in December 2003 to cut the management portion of its charges by 20 percent, or $350 million, over five years.
The five SEC commissioners issued a statement at the time criticizing Spitzer, saying there is "no legitimate basis" for a regulator to act as a "rate setter." Other critics said the market should dictate prices, with investors deciding on factors including reputation and performance as well as price.
While their philosophical disagreements persisted, Spitzer and the SEC cooperated on investigations, and the New York attorney general continued to secure fee cuts.
Bank of America's $675 million in penalties in March 2004 included $160 million in fee cuts. Boston-based MFS Investment Management and Denver-based Janus agreed to $125 million in cuts; there were at least five other such settlements.
After Spitzer's initial announcement, the SEC entered its most active period of fund regulation since 1940. The agency voted to require more information disclosures and ruled that three-quarters of a fund's directors be free of company ties. Under former Chairman William H. Donaldson, the SEC's five commissioners also proposed a so-called hard 4 p.m. close to limit market timing and prevent after-hours trading.
The most effective government action was the "SEC's emphasis on fund disclosure and on the need for independent fund directors to negotiate hard on fund fees with fund advisers," said Harvey J. Goldschmid, a Columbia University law professor who served on the SEC from 2002 until July.
"Nobody these days wants to be the high-cost provider," said John P. Freeman, a University of South Carolina securities law professor who co-wrote a 2003 study that influenced Spitzer's views on fees.
About one-quarter to one-third of the drop in shareholders' costs in the past year can be traced to buying patterns, said Sean Collins, a senior economist at the Washington-based Investment Company Institute. The industry trade group is compiling its own fee study, scheduled for release this month.
American Funds, Vanguard and T. Rowe Price benefited from consumers' shifting to lower-cost providers of funds. American Funds took in $91.9 billion, or 55 percent of the industry's net new investments in equity funds between September 2003 and June, according to data compiled by Financial Research Corp. in Boston. Vanguard had $22.1 billion of inflows, or 13 percent of the total, and Baltimore's T. Rowe Price had $19.3 billion, or 12 percent.
American Funds are sold exclusively through financial advisers, while shares of most Vanguard and T. Rowe Price funds are bought directly by the investors. The commissions paid by buyers of American Funds and other broker-sold investments aren't included in the Morningstar survey.
"Consumers do understand that costs matter," said Michael S. Miller, managing director for planning and development at Vanguard, the second-biggest mutual fund company after Fidelity Investments of Boston.
While the money flowed in, American Funds and Vanguard cut their rates. American's board made a 10 percent reduction in April after trimming charges by 5 percent in September 2004, forgoing about $200 million in annual revenue.
Vanguard this year made more investors eligible for its Admiral shares, which require higher minimum investments and charge lower rates than ordinary, investor-class shares. The move cost Vanguard an estimated $90 million a year. Overall, Vanguard's fees are 12 percent lower than in 2003.