Fund companies are hiking fees as their assets shrink. By Steven Goldberg, Contributing Columnist April 28, 2009 Talk about adding insult to injury. Across the mutual fund industry, expense ratios on stock funds are rising -- without fund companies so much as lifting a finger.Most mutual funds have built in "breakpoints." When assets rise to a certain level, the funds charge lower management fees, as a percentage of assets, on amounts exceeding that level. For instance, a fund might charge 1.5% on the first $1 billion in assets and only 1% on the next $9 billion in assets. These breakpoints benefit shareholders when assets increase. But now, amid the worst bear market since the 1929-1932 crash, many stocks funds have fallen 40% or more in value. Plus, investors have fled poor-performing funds. That leaves the remaining investors holding the bag. Consider Oppenheimer Core Bond A (symbol OPIGX). With a loss of 41% over the past year through April 27, it's one of the worst-performing bond funds. But the expense ratio has crept up from 0.87% to 0.90%. That's because the fund charges a management fee (one part of the expense ratio) of 0.50% annually on the first $1 billion in assets and 0.35% on assets above that amount. Assets fell from $2.2 billion at the end of 2007 to $1.5 billion at the end of last year. (Because of the shrinkage, the proportion of assets charged at 0.50% a year is higher now than when the fund was larger, leading to the higher overall expense ratio.) Advertisement Expenses are rising even at Vanguard, the industry's low-cost leader. For instance, expenses at Vanguard Intermediate-Term Tax Exempt (VWITX), my favorite municipal-bond fund, have climbed from 0.15% to 0.20% a year. No question, the fund industry is suffering. Stock-fund assets at such big firms as the American Funds, Fidelity, Franklin Resources, T. Rowe Price and Vanguard shrunk by roughly 50%. Many companies laid off employees as revenues and profits sank. A wildly profitable business But make no mistake: The fund industry is ridiculously profitable. The net, after-tax profit margin for T. Rowe Price, which charges relatively low fees, was 23% last year. Franklin Resources had a 26% margin. Edward Johnson III, chairman of Fidelity, is still worth $7 billion, enough to rank No. 62 on the Forbes 400 list. Charles Johnson (no relation), chairman of Franklin, is worth $2.5 billion. Advertisement As annoying as they are, the recent increases in expense ratios aren't the primary problem for investors. More important is whether the total fees you pay are reasonable in the first place. Kevin Laughlin, of the Bogle Center for Financial Research, says the answer is clearly no. Take a look at how profits have risen on one fund as assets have grown over the years -- as they have throughout the industry. In 1980, Fidelity Magellan had assets of $53.5 million and an expense ratio of 1.29%. That brought in revenue of roughly $690,000. Magellan, the assets of which exceeded $100 billion in 1999 but today total "only" $18.6 billion, charges 0.72% a year for expenses, producing annual revenue of $134 million. "That's almost a 200-fold increase in revenue," Laughlin says. (Magellan's management fee varies with performance, so the expense ratio would be even higher if the fund had performed better in recent years.) Jack Bogle, founder of both the Vanguard Group and the Bogle Center, has long argued -- to little avail -- that funds should pass along their vast economies of scale to investors in the form of lower expense ratios. (Bogle no longer has any ties with Vanguard.) Mercer Bullard, head of Fund Democracy, an advocacy group for shareholders, urges investors to look for funds that charge lower rates. "You can find a fund that charges less than 1% annually with just as good performance as one that charges more," he says. Advertisement As a fund picker, some of my worst mistakes have been suggesting funds with sky-high expense ratios. One example was Bill Miller's Legg Mason Opportunity (LMOPX), which I started recommending just after it launched in late 1999. Performance was wonderful for years, but then Opportunity imploded. Over the past three years through April 27, the fund lost an annualized 28% -- or an average of 17 percentage points per year worse than Standard & Poor's 500-stock index. The price a fund charges you is money out of your pocket. But it's more than that. I think the amount charged reveals a lot about a firm's corporate culture. Does it regard investors as clients to be served or customers to be fleeced? Steven T. Goldberg (bio) is an investment adviser.