Originally created 05/02/04

Survey shows investors not concerned about fund scandal

NEW YORK -- Mutual fund investors have been bombarded by bad news about some of the companies that oversee their nest eggs, but a recent study found that few people are terribly worried about the industry's problems.

Investigations by state and federal authorities have raised serious questions about companies operating mutual funds, long viewed as a safe and easy way for small investors to diversify their portfolios. The allegations that fund companies allowed large customers to make quick profits on short-term trades at the expense of other shareholders raised alarm among regulators and lawmakers, but haven't resonated as much with small investors.

In fact, more than half the 402 mutual fund investors surveyed by Spectrem Group in February showed a surprising lack of concern about the scandal, said Catherine S. McBreen, managing director of the consulting firm. Those with a greater awareness of the case were more disturbed by high management fees.

"People really don't know what's going on and they're not that concerned about it overall," McBreen said. "The people who are most concerned are those who understand the scandal the least. As the knowledge levels increase, the concern goes down."

Nearly a fifth said they didn't care about allegations of favoritism as long as their returns were high. More than 40 percent admitted to having very little knowledge about the investigations. The majority of those surveyed couldn't even name the fund families involved. Some thought that WorldCom and Enron - two large companies toppled by accounting scandals in recent years - were mutual fund providers, McBreen said.

Many investors seemed generally suspicious about corporate America, but expressed a great deal of faith in their own fund companies and financial professionals. About 50 percent chose their investments with the help of an adviser, broker or other financial planner. Many 401(k) investors believed their retirement plan sponsor or employer would help safeguard their investments.

"There's some expectation that their adviser should be calling them and telling them if they need to make a change," McBreen said. "There's a feeling, 'There should be somebody looking out for me."'

Only about 9 percent of those surveyed had moved their money because of the scandal, or said they were planning to eventually. The majority, 69 percent, were taking a wait-and-see approach.

Investors with greater knowledge of the government's case against the fund families - usually those with higher asset levels - were more concerned about management fees than illegal practices such as market timing and late-trading, McBreen said.

That concern is well-placed, said Mercer Bullard, a former assistant chief counsel at the Securities and Exchange Commission and chief executive of Fund Democracy, a shareholder advocacy group. While some administrative costs are detailed in fund prospectuses and annual reports, there is not nearly enough transparency, he said. The expense ratio doesn't include all costs, and it's usually not clear how much a broker has been paid for selling you a particular fund.

"As a group, they should worry about the scandal, but not as much as they should worry about fees," Bullard said. "In some cases they should be more worried about the scandal ... especially if they're investors in funds that have been implicated in exceedingly egregious conduct."

Several large companies, including Putnam Investments, Alliance Capital Management, MFS Investment Management, Bank of America and FleetBoston Financial, have paid millions to settle charges that they tolerated improper trading to the detriment of long-term investors. Others remain under investigation, including Janus Capital Group Inc., Strong Financial Corp. and Franklin Resources Inc.

Additionally, some advisers have been accused of failing to properly disclose revenue sharing agreements in which brokerage firms sell mutual funds in exchange for cash or commission payments from fund companies. Morgan Stanley agreed to pay $50 million last year to settle charges it failed to fully disclose such conflicts of interest.

There is some evidence investors have been voting with their feet. During the final quarter of 2003, $10.7 billion flowed out of funds named in the investigation, while $28.9 billion flowed into companies untarnished by the case, according to the Investment Company Institute, a mutual fund trade group. The biggest beneficiaries of this shift include American Funds, Vanguard Group, T. Rowe Price and Fidelity Investments.

It's not clear how much money has been lost to market timing or late trading. But whatever the amount, it's probably quite small compared to the tens of billions investors pay in management fees every year, said Eric Tyson, a former financial counselor and the author of the guidebook, "Investing for Dummies." Few investors understand how much these costs eat into their total returns, he said.

The scandal simply offers "another piece of information about which companies are looking out for you," Tyson said. If you invest with a company named in the case, it could be a signal that you should look more closely at your fees.

"The biggest culprits in the fund scandal clearly were not looking out for their investors," Tyson said. "If companies behave in one way that suggests they put management profits ahead of investors, chances are they're doing it in other ways as well."

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