Mutual fund shareholders generally assumed that competition would push prices lower following the slew of well-publicized settlements in the market-timing scandal. Every single fund family that sat down with New York Attorney General Eliot Spitzer agreed to reduce fees on some or all of their funds. And the general belief in the industry has been that even funds not named in the scandals would have to follow suit, leading to something of a price war.

Well, you know what they say about assumptions.

According to a number of industry analysts, the pricing war has yet to materialize and there are even doubts it ever will. Furthermore, the majority of shareholders waiting to see which way their fund prices are headed will have to wait until next year to find out.

The Case of the Missing Momentum

"People thought there would be momentum coming out of the scandal and it's pretty much died," says Roy Weitz, founder of the industry watchdog Web site "The funds that have lowered fees have done it out of duress. I don't see any downward pressure at all. In fact, I think the trend might be higher."

Bridget Hughes, analyst at Morningstar, says "it's still early," but adds she has not seen any competitive matching from companies not named by Spitzer. Hughes says one potential reason for the lack of competitive pressure is that "a lot of the funds that got caught were not best of breed anyway." She cites

Alliance Capital's

fees as being pretty expensive before the Spitzer settlement brought them into line with competitors, circumstances that surely would not spur a price war.

Mutual fund consultant Geoff Bobroff, on the other hand, says the direction of prices is "clearly down," thanks to improved corporate governance as well as the Spitzer effect.

"Board members are realizing they are under the microscope and want to fulfill their obligations," says Bobroff. "And that means matching the competition if the competitive data says there is a compression of fees."

Nevertheless, all things considered, mutual fund shareholders are certainly due for a break. According to fund-tracking firm Lipper, the median total expense ratio for general equity funds has increased every year over the past five years, to 1.45% in 2003 from 1.33% in 1999.

A large part of that expense ratio consists of management fees, which have stayed steady at roughly 70 basis points over the five-year period. The remainder of the expense ratio is made up of nonmanagement expenses like transfer agency and legal fees and 12b-1 fees, which cover marketing expenses and payments to brokerage houses for distribution services.

Lucas Garland, an analyst at Lipper, says an end to the streak might be in sight. According to the Lipper database, 939 classes of shares have decreased their contractual management fees since last November compared with 181 that have increased them. That's definitely a good start, but don't be too swayed by that seemingly overwhelming number. Not only can a single fund contain multiple classes, but the survey data include many funds from the same fund family. For example, more than 80

Alliance Capital

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funds are included in the list as decreasing their fees as a result of the Spitzer settlement.

But then again, there are still a number of prominent fund firms that have yet to settle with Spitzer over the market-timing scandal, including

Bank One

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Pilgrim Baxter

. Spitzer has accused Bank One's fund unit of making rapid trades for hedge fund Canary Capital. Pilgrim Baxter is charged with allowing several hedge funds to market-time the


PBHG Growth Fund. And the next wave in settlements might trigger the first salvo in that long-awaited price war.

Just Wait Until Next Year

Despite the promising survey results from Lipper, the contractual fee reductions negotiated by fund boards still have to be passed on to shareholders. And that's not a sure thing either.

Max Rottersman, founder of another industry watchdog Web site,, says investors need to get fund companies to negotiate lower fees from subadvisers who manage their funds. "They need to make sure the board of directors passes those savings on to the shareholders.

"In 2001, the industry pushed to lower expense ratios by pressuring subadvisers to lower their management fees," says Rottersman. "But they didn't pass those savings onto shareholders in all cases."

Rottersman says shareholders need to write to their boards now, "otherwise they will assume fees are OK."

For shareholders intending to take Rottersman's advice and send a note to the appropriate board, don't expect to see any results from your efforts until early next year. Some 60% of management contracts between funds and their advisers are negotiated in the late fall. Therefore, any notification of a change in fees would have to be sent to shareholders early next year in the form of a prospectus supplement.

But even a massive letter-writing campaign might not do the trick, according to's Weitz. He says that most of the management contracts are multiyear, so if the contract is not up, there is no reason to meet and reassess costs. "And even if they meet in an off year, they probably won't talk about fees."