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Can't We All Just Find Out What We're Paying?

Consumers should rally behind the kind of dollars-and-cents disclosure recently recommended by the SEC's Investor Advisory Committee.

Imagine this scenario: You're in a grocery store doing your weekly shopping. As you add bananas, milk, and pretzels to your cart, you can see the per-item and per-ounce prices, just as you can in your local Kroger or Whole Foods.

But when you get to the checkout counter, something mysterious happens. Rather than presenting you with a bill and taking your credit card or cash to cover it, the cashier assures you that "We'll just take it out of your account." Unless you were carrying a calculator with you and tallying up your purchases as you were shopping, you'll leave the store not really knowing what you've just spent.

Even more mysteriously, the amount of your total outlay may not be readily apparent when you get your account statement, either. You'll see your "before" and "after" balances, but you won't see line items for any specific charges you've racked up during the month.

"Madness!" you say. Such a grocery store would be out of business in no time. How can consumers make good choices when they never see a bill?

But think about it: That's precisely how much of the financial services industry does business. Rather than asking consumers to write a check for their share of banking or mutual fund expenses, or even providing them with a basic dollar-and-cents statement detailing how much they actually paid during a given month or year, banks, asset managers, and other financial institutions simply go into your account and take out enough to cover your expenses.

That's perfectly legal, of course, and consumers have signed off on this arrangement. The current setup of extracting fees directly from client accounts is also likely the most efficient and cost-effective for all concerned. Moreover, if consumers were actually forced to write checks to their financial-service providers, that could serve as a disincentive to save in the first place--a definite negative in a country in which average savings rates are low relative to those in other developed economies.

But some commonsense disclosure from financial services firms would be a good first step. As my colleague Russ Kinnel once noted, most people can give you a pretty precise read on how much they're paying per month or year for smaller expenses, such as cable TV or utilities. But ask them how much they're forking over for financial services and you're apt to be greeted with a blank stare, even though these costs can easily be among a household's highest. The reason? Consumers never see a clean, uncluttered statement of their share of expenses expressed in dollar terms. And the net effect of this information void is that purchasers of financial products and services are much less attentive to costs than they should be.

Take expenses for mutual funds, for example--arguably the most transparent area for consumers in the financial services industry. Right now, investors can see fund expenses expressed as a percentage of assets, which is an invaluable tool as they attempt to choose among funds. And those disclosures do seem to be having an effect: We've seen consumers exhibit a strong preference for low-cost products, especially exchange-traded funds and index funds, in recent years—a good indication that financial consumers are aware of the drag that expenses impose on their returns.

But fund expense ratios, the equivalent of the per-item or per-ounce pricing on the grocery shelves--highly useful, but lacking big-picture, real-world context. Moreover, all fund expense ratios may look innocuously small to the untrained eye. 1%, 2%--nothing to get too excited about. Until you know that you paid $4.80 for three organic peaches or $1,600 for management of your Fidelity funds last year, you're making crucial decisions with an incomplete set of information. You're simply not in a position to decide if you've gotten a good value for your dough. Currently available disclosures (in mutual fund prospectuses) that require fund firms to project your dollars-and-cents outlay per $10,000 are directionally correct, but consumers shouldn’t have to do any math to know what they paid.

A valuable next step would be to provide consumers with dollars-and-cents disclosure on their account statements, as laid out in a recent recommendation from the SEC's Investor Advisory Committee. As my colleague John Rekenthaler noted, financial firms are sure to balk at such a requirement, arguing that its net effect will be to jack up overall costs in the industry or--worse yet--discourage consumers from using valuable financial products altogether. But seeing this information--just like scrutinizing your final receipt after an expensive visit to the grocery store--is essential to improving consumers' financial decision-making processes. And as the Investor Advisory Committee's recommendation points out, investors are much more likely to look at their account statements than any other type of shareholder literature, such as a prospectus.

If you like the idea of receiving customized, dollars-and-cents disclosure from your mutual fund companies, let the SEC's Investor Advisory Committee know. To do so, click the "Submit comments to the Committee" link on the right-hand side of the Investment Advisory Committee page. (Here's the complete recommendation, if you'd like to read through it and/or reference it in your comment.) If informed investors (looking at you, readers of Morningstar.com) make their views known, perhaps we can finally get this essential piece of information in all investors' hands.

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