The Cost of Conflicts of Interest
John P. Freeman* & Stewart L. Brown**
The Journal of Corporation Law, University of Iowa | Spring, 2001
* Campbell Professor of Legal and Business Ethics, University of South Carolina. B.B.A., 1967; J.D., 1970, University of Notre Dame; LL.M. 1976, University of Pennsylvania. Member, Ohio and South Carolina Bars.
** Professor of Finance, Florida State University. B.S.B.A., 1970; M.B.A. 1971; Ph.D. 1974, University of Florida; CFA.
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… In the early 1970s, America’s mutual fund industry was suffering net redemptions, meaning it was contracting in size. … Wildly different fee structures apply to equity portfolio investment advisory services purchased by public pension funds on the free market compared to the same form of services purchased by investor-owned mutual funds. … ” Other evidence that advisory fee structures are unusually lucrative in the fund industry in comparison with pension advisory business comes in the form of reports that fund advisor buy-outs are more costly than acquisitions of firms that advise pensions. … Regressions of the following form were run on both the pension and mutual fund data: Advisory Fee = a + b (Ln Size), where the advisory fees are scaled in whole basis points, and size is scaled in millions of dollars under management. … This means that equity portfolio size explains only 6% of the variation of mutual fund advisory fees but 27% of pension advisory fee. … ” A fund shareholder who today seeks “clear disclosure” about the advisor’s bill for portfolio management, its advisor’s profitability, or its demonstrated willingness to perform comparable services for significantly lower prices will not find this information…
n200 Improving Price Competition, supra note 40, at 79-93 (statement of Matthew P. Fink, President, Investment Company Institute). In fairness, Mr. Fink is not alone in extolling the fund industry’s alleged competitiveness. See, e.g., Alyssa A. Lappen, Funds Follies, Inst. Inv., Oct. 1993, at 39 (“[A] pressing concern [is] quite simply, whether the nation’s banks, as a group, have the financial – or intellectual – wherewithal to succeed in the ferociously competitive mutual fund business.”)….
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