ICI's Fink Says Spitzer Is Misinterpreting Fund Data

January 29, 2004 (PLANSPONSOR.com) - New York Attorney General Eliot Spitzer's assertion that mutual funds charge more for portfolio advisory fees than pension funds is "a misinterpretation of the data."

The problem is Spitzer’s continued use of a “flawed methodology” that has been proven incorrect, says Investment Company Institute’s (ICI) president Matthew Fink in a news release.   Fink made his comments after Spitzer made his comments about mutual fund fees at a hearing of the US Senate Governmental Affairs subcommittee on Financial Management.

This flaw is based on a study that Spitzer cites, which Fink says has been “proven incorrect.”   That study draws parallels between a mutual fund’s management fees and a pension fund’s advisory fees.

Specifically, Spitzer and the ICI are at odds about a critique produced by the ICI of a 2001 law journal article by John Freeman and Stewart Brown. This analysis compared the costs of portfolio management services paid by pension plans with those of mutual funds. On the basis of the calculations conducted by the pair, it was concluded that mutual funds pay considerably more for portfolio management than do pension plans.

However, the ICI said in its critique that the conclusions of Freeman’s and Brown’s analysis compared the “investment advisory fees” paid by pension plans for portfolio management with the “management fees” of mutual funds.   This is a comparison the ICI characterizes as “apples-to-oranges” due to the management fees of mutual funds covering more than just portfolio management.

“Thus, the analysis in the Freeman and Brown article, which Spitzer was referring to, says little about the relative costs that pension plans and mutual funds incur for portfolio management,” the ICI release continued.

For a more accurate representation of the two, ICI points to its own comparison of the fees that pension plans and mutual portfolio pay.   This was done by ICI through an examination of the subadvisory fees of mutual funds, which found the portfolio management fees paid by pension plans were nearly identical with those paid by subadvised mutual funds.   Based on its analysis, the ICI concluded that there is no evidence that mutual fund investors overpay for investment advice.

“Unfortunately, Mr. Spitzer continues to rely on Freeman’s and Brown’s incorrect, flawed data. The fact is that there is little difference in fees for comparable services provided to pension funds and mutual funds, and had Freeman and Brown conducted such a study they would have reached the same conclusion,” Fink said in the news release.