Fighting The Fund Cheats

Their Boards of Directors hide: You don't even know how to contact the board with a complaint. The whistleblowers who outed the deceptive funds didn't go to the boards, they went to state regulators instead.

Reforms needed: The amount your fund pays in brokerage commissions and soft dollars should be disclosed. Boards of directors, who are supposed to represent you, should put their names and a contact point into the annual report. Morningstar managing director Don Phillips thinks they should write a yearly shareholder letter saying what they did.

Brokers don't give you required discounts on sales commissions: If you buy A shares with a front-end load, and invest a large amount--say, more than $25,000 or $50,000 from an IRA rollover--you're entitled to a lower sales charge. Where the discount kicks in is called a "breakpoint"--but tons of investors aren't getting the discounts they deserve. The NASD has ordered the firms to contact clients and repay overcharges.

Some brokers sell large investors B shares, which have no breakpoints, hence no discount--and you also pay higher annual fees. If A shares would have been cheaper, tell your broker to redo the buy. Calculating breakpoints is more complicated than I've shown here. For details, go to nasd.com and look for its informational Investor Alerts.

They charge you double loads: Few investors (and brokers) know that if you're switched from one load fund to another, you usually don't have to pay the load a second time. The rules apply even if you buy from a different broker. Planner Rick Sabo of Money Concepts in Gibsonia, Pa., got $1,520 back for a client just by asking the new fund for a fix.

Reforms needed: Brokers should disclose how much the funds pay them to make a sale. Costs should be shown in dollars and cents (something Vanguard has started with its funds). "The best thing that could come out of this mess is full fee disclosure on one piece of paper," says Mary Schapiro, vice chair of the NASD.