If you think fund expenses don't matter, better think again

Kiplinger's Personal Finance Magazine, March, 1998 by Robert Frick

The only other player with a sword big enough to slay the expense dragon, the Securities and Exchange Commission, so far hasn't focused on expenses. A groundswell revolt may be forming, however. Morningstar's Phillips says he sees consumer sentiment changing from pride in owning top-performing funds ten years ago to irritation that most funds badly underperform market indexes today. "There's a growing impression that the services mutual funds offer are substandard." He and Bogle also think that when stock-market returns drop back to the 10% level they've averaged historically, a 1.5% expense ratio will start looking more like a 15% load each year and more people will resist. Case in point: A group of 71 financial advisers who cater to wealthy clients sent a letter to mutual fund companies asking for lower fees for their clients, among other things. One of those advisers, Harold Evensky of Coral Gables, Fla., says he doesn't begrudge mutual funds' making a profit, but there's a difference between "fair compensation" and "what the market will bear." Many advisers use low-expense index funds.

To become part of the revolt, you must first identify the enemy. Take the number of dollars you have in a mutual fund and multiply that by the fund's expense ratio to learn how much you're spending for investment management. Then search for a fund with similar or better returns and risk profile but lower expenses, and make the same calculation. The difference is money in your pocket. If it's enough of an incentive, make the switch. ashioning the