Government Probes Fidelity Over Obscure Mutual-Fund Fees

Boston-based firm characterizes so-called infrastructure fee as solution to ‘broken’ business model

.. By marking the charge as an infrastructure fee, the fund firms may be able to avoid disclosing it to investors.
.. Fund companies that decline to pay the amount will “be subject to a very limited relationship” with the company, the document says. Funds can either pay the fee themselves or push the cost onto investors in the mutual fund. This can increase the overall fees of a fund, causing individual investors to pay more and dent returns.
.. The fee is calculated as 0.15% of a mutual-fund company’s industrywide assets, not just on the dollar amount of assets held by Fidelity customers buying shares on the platform, the document says.

The infrastructure fee appears to be a way for Fidelity to make up for revenue the firm has lost as a result of investors flocking to reduced-cost mutual funds, a situation the firm refers to in the document as “unsustainable economics.” Fidelity also stated in the document that its traditional business model is “broken” and characterized the infrastructure fee as a solution to that problem.

.. The infrastructure fee is levied on lower-cost share classes such as those aimed at retirement accounts. The Labor Department has jurisdiction over retirement accounts that are subject to extra protections and disclosures under the Employee Retirement Income Security Act, or Erisa.

.. The document outlining the infrastructure fee, “Fidelity FundsNetwork Business & Services Guide,” is “not to be distributed to the public as sales material in oral or written form,” and “may not be shared with any third party.”

.. When a fund pays a fee that aims to result in the sale of fund shares, either directly or indirectly, securities laws require it to be part of what is known as a 12b-1 plan and to be disclosed to investors. Many lower-cost fund share classes don’t have 12b-1 plans—a reason why they are cheaper.

.. The Fidelity infrastructure fee is also the subject of a lawsuit filed last week in a Massachusetts federal court by a participant in a retirement plan offered by T-Mobile US, Inc. In that suit, the plaintiff contends that the infrastructure charge is prohibited under Erisa and that Fidelity incentivizes mutual funds on its platform to “conceal the true nature of fees associated with these funds.”

Why Are Mutual Fund Fees So High? This Billionaire Knows

Mr. Baron’s mutual funds charge some of the higher investment fees around, and the fees have held steady despite a $1 trillion exodus out of old-school mutual funds into cheaper, better performing rivals that track a variety of indexes and investment styles.

In a global economy where competition and Amazonian price destruction have forced companies to cater to cost-wary customers, the mutual fund industry is a rare outlier. Fees on most actively managed mutual funds, which house the retirement savings and other assets of millions of Americans, have barely budged.

The reasons for that — quiescent mutual fund boards, complacent investors and a general unwillingness to call a halt to one of the great gravy trains in financial history — are all visible inside Mr. Baron’s fund family.

.. An old-fashioned stock picker, Mr. Baron achieved renown in the 1990s and the 2000s for successfully betting on small companies.

.. Mr. Baron, 74, is perhaps best known for his annual investment conference, now held at the Metropolitan Opera House at New York’s Lincoln Center and in its 26th year. Mixing rock stars, pop entertainment (Barbra Streisand and Paul McCartney have performed in the past), patriotism (this year celebrated the 100th anniversary of President John F. Kennedy’s birth) and triumphant chief executives, the gala is a giddy ode to American capitalism

.. Mr. Baron is unapologetic about the high fees. He argues that his skills and experience — and the arduous task of researching small growth companies — justify the fees.

.. “Since inception, 98 percent of our funds have beaten their benchmark,” he said in an interview. “If you want the lowest fee, you should not invest with us.”

.. But if you want to bet on American growth stocks, “you can double your money in 10 years,” he said. He frequently sticks with his top picks for decades.

.. Mr. Baron believes that the true measure of his success is performance since his fund’s launch in 1994.

.. Industry experts say there are several reasons that active mutual fund fees have not succumbed to broader pricing trends in the economy.

.. The first is their power. While more than $1 trillion has left higher-fee funds in favor of passive competitors, that still leaves some $10 trillion. That generates about $100 billion in fees for fund companies. And it suggests they don’t need to cut fees to retain assets.

.. With funds’ multiple share classes, varying structures and oceans of boilerplate, even sophisticated investors may not realize they are paying up for a laggard.

.. allege that trustees are not pushing hard enough for lower fees.

.. At the Baron fund family, the fee oversight is complicated by the fact that Mr. Baron, the largest shareholder in the investment company and the manager of its largest fund, has a financial incentive to keep fees high.

.. “Compensation based on fees is worrisome,”

.. “Kicking and scratching is unlikely to lower fees but certainly will antagonize the manager, which is the one institution that can arrange for the trustees’ dismissal. Besides, trustees will tell themselves, if a fund’s fees really are too high, the market will sort things out and investors simply won’t invest in the fund.”

.. In 1982, after a stint as a Wall Street analyst, he founded his investment firm.

His timing was perfect. It was the start of a bull market, and he developed an expertise in picking small companies that would grow into big ones such as Charles Schwab, Vail Management Company and Tesla.

.. It was the heyday of the individual stock picker. Peter Lynch at Fidelity and Bill Miller at Legg Mason gained cultlike followings

.. his annual investor gala, which he pays for himself, that defines him. Onstage, he cultivates a grandfatherly mien, bragging about how much money the chief executives of his portfolio companies made for Baron shareholders. His chief maxim is “We invest in people,” and he treats management as family.

.. he offered to connect her with his longtime tax lawyer. “It’s incredible what he has done,” Mr. Baron said

Who Is Winning With the Fiduciary Rule? Wall Street

The rule requires brokers to act in the best interests of retirement savers, rather than sell products that are merely suitable but could make brokers more money. Financial firms decried the restriction, which began to take effect in June, as limiting consumer choice while raising their compliance costs and potential liability.

But adherence is proving a positive. Firms are pushing customers toward accounts that charge an annual fee on their assets, rather than commissions which can violate the rule, and such fee-based accounts have long been more lucrative for the industry.

In earnings calls, executives are citing the Department of Labor rule, known varyingly as the DOL or fiduciary rule, as a boon.

.. “Whether it’s in clients’ best interest is unclear,” said Steven Chubak, an analyst at Nomura Instinet. But the fiduciary rule is ”incentivizing firms to accelerate conversions“ to fees from commissions, he said, and “certainly the amount charged on a fee-based account versus a [commission-based] brokerage account is higher.” The push is speeding up an industry trend toward fees, which offer more predictable revenue than commission-based accounts.

.. The fiduciary rule also is supporting the shift to lower-cost index funds

.. Other changes stemming from the fiduciary rule could hurt over the longer term.

.. products such as higher-cost mutual funds face pressure from lower-cost passively managed funds

Canadian Investment Regulations Require Disclosing Fees

Because they’re so frugal, Heather and Harry were vexed to see how much they are paying in investment fees. The numbers appeared in the new, more detailed statement investment firms are required to send clients under regulatory guidelines known as the Client Relationship Model 2, or CRM2.

..  it is understandable that they have a concern about the $7,000 they pay in fees each year on their mutual fund investments

What’s My Investing Fee? A Frustrating Quest

Our reporter thought she had a simple question, but the answers were anything but

I thought my question was simple: How much was I paying my investment adviser in fees?After a series of phone calls that elicited the kind of confusion and frustration I have rarely experienced outside of interactions with cable-company customer-service representatives, I think I have an idea. Barely.

Describing the fee disclosures of my adviser as opaque would be generous. The experience left me wondering whether someone even less savvy than me, a Wall Street Journal reporter, would be able to navigate this system, to ferret out the good information from the bad.

 

.. My combined fee was 1.4%.

 

 ..“I am trying to find a client approved document that provides you with the internal expenses on the portfolio you are invested in,” my adviser wrote.I am still waiting.