Compliance June 20, 2007

Bad Move?

Sooner or later, we all make what appears to be, in hindsight anyway, a bad career move.

Reported by

Well, the popular 1980s rock band Motley Crue thinks they made one – or maybe two. And, no, we’re not talking about that infamous Tommy Lee/Pamela Anderson video, or lead singer Vince Neil’s short-lived solo career.

The band—which enjoyed hits with “Girls, Girls, Girls,” “Doctor Feelgood”, and “Same Ol’ Situation’—is suing Carl Stubner and the company he works for (Sanctuary Group) for more than $20 million—claiming he pushed drummer Tommy Lee into doing two disastrous reality shows that took him away from the group and forced the cancellation of dozens of concerts.

The suit, filed earlier this week in Superior Court in Los Angeles, claimed fraud and breach of fiduciary duties. The suit claimed that, beginning in 2005, Stubner and Sanctuary got Lee involved in “bad career moves” including the (blissfully) short-lived reality TV show “Tommy Lee Goes to College.”

The Associated Press reports that the show was “a ratings disaster” that portrayed Lee as “incoherent, lazy and incompetent,” disruptive in classes, and unable to keep a beat in a school marching band, according to the suit. The suit also cited the failure of “Rock Star: Supernova.’

Acts of Commission?

Advisers are sometimes accused of being influenced by commission structures. Well, the Motley Crue suit contends that these TV shows were part of a “self-serving scheme” to promote Lee’s personal work at the expense of the group—because Stubner got a higher commission for solo projects. Stubner, who acts as Tommy Lee’s manager (his company apparently represents the band as a whole), did not make Lee available for a 2006 European tour, forcing Motley Crue to cancel 40 concerts at an estimated $8 million loss in ticket and merchandising sales, the suit said.

The suit also contends that Stubner demanded 100 free tickets for Motley Crue shows, which he resold at “scalper” prices.

The Markets June 20, 2007

Lowest Fund Fees in 25 Years, But Not for Funds-of-Funds

Investors in stock funds last year reportedly paid the lowest fees in more than a quarter century, thanks to preferences for lower-cost funds and increased competition among fund companies.

Reported by

Alison Cooke

In fact, of the total assets held in stock funds, 90% are in funds with below-average expense ratios, according to the Investment Company Institute’s (ICI) annual fee study. The ICI is the trade industry group for the mutual fund industry. According to the ICI release, researchers claimed the fee decline has been most pronounced among stock and bond funds for which fees and expenses paid by investors have dropped by more than 50% since 1980.

In order to evaluate the costs, ICI reached an estimate of total fund fees by combining one-time sales loads and ongoing expenses into a single measure of fund ownership costs and adding a fund’s annual expense ratio to an estimate of the annualized cost investors pay for onetime sales loads.

Lack of Fund of Funds Inclusion

The study only compared stock funds, and did not include fund of funds, despite a significant interest and increase in usage through the introduction of lifecycle and lifestyle funds. There has been increased interest in such funds as they have been used in retirement plans and they are frequently criticized because they often charge a fee on top of the fees for each underlying fund.

“Because of their special structure, the inclusion of funds of funds can only raise the asset-weighted average expense ratio,’ the report says; “thus, excluding funds of funds could produce an average expense ratio that understates the expenses that shareholders actually incur for investing in stock funds.’ However, ICI said the inclusion of funds of funds would have little effect on either the level or trend in the average expense ratio of stock funds, saying the level of the expense ratio of stock funds would be boosted by 1 basis point or less up until 2005 and by 2 basis points thereafter. Therefore, “regardless of whether funds of funds are excluded or included, the average expense ratio of stock funds would have fallen by 2 basis points in 2006 and by more than 10 basis points over the past decade.’

Despite that contention, ICI’s report says that because continued interest in such funds could begin to add more to the average expense ratio of stock funds, future ICI updates on mutual fund fees and expenses will monitor the fees and expenses of funds of funds.

Fee Specifics

According to the ICI report, stock fund investors on average paid 107 basis points in fees and expenses in 2006, a drop of 4 basis points from the year before, while bond fund fees and expenses fell to 83 basis points in 2006, a decline of 5 basis points. Over the past five years, the average expense ratio of stock funds has dropped 11 basis points, according to the report.

In 2006, the average maximum sales load on stock funds was 5.28%, but the average sales loads investors actually paid was just 1.31%, owing to load discounts on large purchases and waivers on purchases through 401(k) plans.

Investors’ preference for low-cost mutual funds is reflected in their purchases of both actively managed and index mutual funds, according to ICI. For example, during the 10-year period from 1997 to 2006, 90% of investors’ new purchases of stock funds went to those funds whose expense ratios were below the average expense ratio of stock funds offered in the marketplace.

A copy of the study results is available at http://www.ici.org/new/fm-v16n2.pdf.