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Fund paying lightly for past misdeeds | |||
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By DAVID MOON, Moon Capital
Management Imagine you bought a new car from your favorite local car dealership. (Or boat. Or haircut. The product is irrelevant.) For years, you bought all of your cars there; you trusted your salesman and the reputation of the business within the community. Then you found out the dealer had been selling you cars the salesmen had been driving for months, rolling back the odometer, then claiming the cars were new. He had also been charging you for repairs that would have been covered under warranty. When the scam is uncovered by the local authorities, imagine if the dealer agreed to pay each customer a fine of $2,500. But not in cash - in coupons good toward the purchase of a new car from that dealership. I was reminded of this form of "justice" last week when Alliance Capital agreed to slash their investment management fees by twenty percent - for a period of five years - in response to the discovery that their senior executives approved the market timing practices of some fund investors. My initial reaction to the Alliance news was, "Good. Those guys have cheated their shareholders for who knows how long and finally they're going to pay where it hurts most: from their pocketbooks." But the more I thought about it, the more incensed I became at the deal. When John Shumaker was caught with his hand in the cookie jar at UT, he repaid the University for a bunch of personal expenses that had previously been paid by students, parents, donors and state taxpayers. He said something to the effect of "gee whiz, guys. I didn't realize you didn't want me to steal. Here's some of your own money back to help you feel better. I promise not to do anything like that again. I do get to keep my job, don't I?" That's Alliance Capital. They are doing whatever necessary to save their assets. What does a fee reduction say and do, however? First, it reduces the costs for all future Alliance shareholders. The only way a wronged shareholder participates in a fee reduction is to keep his money with the people who screwed him in the first place. Gomer Pyle's grandmother used to say, "fool me once, shame on you; fool me twice, shame on me." Why reduce the fees at all? No one has alleged that the fees were too high. (Not yet, anyway.) If Alliance is so eager to reduce its fees, does that mean their fees were too high all along? If your insurance agent offers to sell you a less expensive policy - with all the same benefits ' but only after you threaten to move your business, why didn't he offer that less expensive policy in the first place? Cutting into the pockets of the fund management companies and their executives sounds like a nice start. But in the rush to make "progress" in this area, I am afraid we are letting the devil dictate the terms of his own release. David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).
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