Step Up Your Fund Manager Scrutiny

Does your mutual fund manager have your best interests in mind? Are you paying too much in fund fees? Ask yourself those questions as you approach your year-end investment review.

The answers could be just as important to your financial success as your asset allocation and fund performance.

One fund-information provider can help with this issue. Morningstar offers a unique service that helps examine the alignment of fund manager interests with the interest of fund shareholders. The firm offers "stewardship grades" as part of its $135 annual premium membership plan.

These ratings, first introduced after the mutual fund scandals of 2003, got a big boost with a 2005 Securities and Exchange Commission requirement that mutual funds disclose fund manager compensation and incentives, as well as how much money they personally have invested in their fund.

Don Phillips, managing director of Morningstar, says that even if investors don't pay close attention to the fine print, "the very fact that the funds must disclose this information is forcing closer attention to these issues."

Phillips points out that in the 1990s, many fund managers were compensated on the basis of their amount of assets under management, not by performance. As a result, those managers focused on short-term performance reporting.

Being at the top of a widely reported quarterly performance list would attract "hot money" -- new assets coming into their fund, and a larger bonus for the manager. But that wasn't in the best interest of the long-term fund investor. Now, Phillips notes, more managers' incentives are based on rolling three-year performance records.

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