Investor actions speak louder

Updated: Apr 30 2006, 05:30am hrs
Critiques of the way people behave in 21st-century consumer society suffer from a strange inconsistency. At one moment, they are extremely forgiving, at the next ultra-harsh. Notice that when a person pays $2.49 for a bottle of water, ignoring the free drinking fountain just down the hall, nobody calls him an idiot. I pass no judgment as I watch a neighbor hire a lawn service, then drive off to an expensive health club to get some exercise while the workers cut his grass.

If I did venture a caustic comment on these matters, it would fall on unheeding ears. Why fight progress Thats just the way the human species has evolved in a post-modern, information economy. Old models of efficiency and utility obviously no longer apply.

But let an innocent soul invest money in some mutual fund other than a no-frills index fund with a rock-bottom management fee, and the cries of derision immediately rise: Hey chump, youre doing it all wrong.

This situation has drawn some much-overdue scrutiny of late from Paula Tkac, financial economist at the Federal Reserve Bank of Atlanta, who has been stating her case at policy conferences and in a Wall Street Journal op-ed.

Investors are best viewed as customers of mutual-fund services, Tkac wrote in a paper assessing the politics and economics of the fund industry, which has grown in 80 years to an amazing $9 trillion of assets in the US and $17 trillion worldwide. The paper can be found on the Atlanta Feds Web site at http://www.frbatlanta. org/econ_rd/bios/bios_index.cfm

Whole new view

Whats so remarkable about her simple statement It differs radically from the way most of the commentariat looks at funds. The official version says fund investors arent just clients; they are the owners of the business. As owners, they need to exercise constant oversight of the hired managers.

Package deal

Experts may be unable, or unwilling, to perceive what it is that investors want. Fund investors buy something beyond the numbers.

They may see it as part convenience, part risk management -- with probably a good measure of trustworthiness thrown in. This last, in particular, is subject to disappointment. As it happens, the marketplace provides a check on this risk, in the form of competition.

Free to choose

Consider that one of the main constraints on fund investors freedom of choice is imposed by the very government that would protect them. That is the capital gains tax investors typically face upon selling one fund to move their money to another.

And what makes those taxes so necessary Why, to pay, among other things, for the regulatory bodies that protect people such as fund investors.

As in most things, a balance is called for here. Tkac performs a great service by reminding the experts to give investor-consumers a chance to speak via their actions. This will work best if the experts dont spend all their time telling the investors what they ought to do.

Bloomberg