As intense scrutiny of the $7.5 trillion mutual-fund industry continues, the latest hot-button issue is how much funds pay to execute their stock trades.
Regulators are asking if funds should highlight commissions, which now get buried in reports rarely seen by investors.

Some funds already are doing so on their own. Starting in the third quarter, Massachusetts Financial Services Co., a Sun Life Financial, Inc. subsidiary, plans to report the average cost of brokerage commissions in pennies per share of stock traded.

"I think that's the most meaningful thing you can tell people" about trading costs, Robert Pozen, nonexecutive chairman of MFS said in an interview. In testimony to the Senate Banking Committee last month, he said fund shareholders "ought to understand what they're paying for commissions per share."

MFS last week agreed to pay $50 million to settle Securities and Exchange Commission allegations that it didn't properly disclose using commissions to reward brokers for promoting its funds. It didn't admit or deny wrongdoing.
Critics say funds continue to pay lavish commissions even though computerized trading can cost less than a penny per share.

Whether investors care isn't clear. "Eyes tend to glaze over" when discussing commission costs, Rutgers University professor William Lutz said in Senate testimony. "The question always is: What does this mean to me and to my investment?"

Plenty of money may be at stake. Although low commissions are no bargain if the fund doesn't get good prices for the shares it trades, high commissions can reduce returns and rob investors of superior fund performance.

"It is a hidden fee, in a sense," said Don Phillips, managing director of Morningstar Inc., a Chicago investment research firm.

Index funds may spend less than 0.05% of fund assets a year on commissions, while actively managed funds might fork over almost 1%. On average, Mr. Phillips said, stock funds spend 0.30% of fund assets a year on commissions. Funds that do a lot of trading can wind up spending big bucks.

According to a survey of 125 large stock funds by FundExpenses.com, a New York research firm, the $12 billion MFS Investors Growth Stock Fund, for example, paid $74 million in commissions in 2003. That is equal to 0.61% of assets, twice the average. Turnover, reflecting the change in fund holdings over the year, was 227%.

In contrast, the $4 billion Sequoia Fund spent less than $400,000 on commissions, just a tiny fraction of 1% of assets, and turned over just 8% of its portfolio, according to FundExpenses. com.

Lipper Inc., a fund research firm, analyzed 3,867 stock funds and found that in the most recent fiscal year, 86 paid more in commissions than their total expense ratio -- the percentage of fund assets used for expenses. Lipper also found 173 funds paid commissions of 1% or more; the dollar-weighted average expense ratio for stock funds is 1%. Lipper's results don't cover all stock funds. Nearly 13% didn't report commission payments. Funds may avoid reporting if their portfolios include bonds, which trade based on markups and markdowns, not commissions.

The SEC has issued a study asking whether funds reveal enough on commissions and harder-to-measure trading costs. Mutual funds now report the dollar amount of brokerage commissions paid in their statement of additional information, which is available only upon request.

Consumer advocates say it would be better if funds reported brokerage costs as a percentage of assets, making it easy to compare spending at different funds, and included them in documents automatically sent to fund shareholders.

Mercer Bullard, an assistant law professor at the University of Mississippi and founder of Fund Democracy, a shareholder activist group, says funds should include commissions in their expense ratio. Excluding commissions produces a misleading "partial expense ratio," he says, citing a study of 30 large funds by Zero Alpha Group, a network of fee-based investment advisers, which found brokerage costs can be three to four times a fund's reported expense ratio.

But Mr. Pozen of MFS said that commissions are accounted for as a capital expense and therefore shouldn't be folded in with operating expenses. MFS will show average per-share commissions in shareholder reports but exclude them from expense ratios.

Putnam Investments, a Marsh & McLennan Cos. unit under investigation for alleged trading abuses, announced in January it will modify fund prospectuses to report brokerage commissions as a percentage of fund assets.