Morgan White has seen the future... and it includes lower fees to mutual fund management companies.

Mr. White, who went from a Masters degree in Electrical Engineering and a Stanford MBA to money management, is a principal in Woodside Asset Management, a Menlo Park, California advisory firm. As a member of the Schwab Institutional Advisory Council, Mr. White has a front row seat on the second biggest change in investment practices in our lifetime: the shift from commission based investing to fee based investing.

The largest change is the move from individual securities to mutual funds.

Mr. White appreciates the benefits of the change--- reduced conflict of interest--- but he's also aware that charging 2 or 3 percent to manage someones money may not provide much of an improvement in end results for the average investor.

How does he avoid the problem?

By having large accounts. With a minimum of $1 million, his firm manages for 1 percent a year and buys individual securities for everything but its international commitments.

"By and large, I believe anyone who has the intellectual discipline and the time can, and should, manage their own money.", he said in a recent interview.

"But many people are money phobic. It's a mystery to them. And managing it is exalted. It's almost as if the magazines were holding up managers as a Shaman class--- people who have wisdom others don't possess."

"I believe the biggest value an advisor brings to the table, aside from which funds to use, is that the advisor is somewhat more objective. That's a key to success... The average person is better served by someone who isn't selling something. Just keeping people out of bad deals can be very valuable. Objectivity and independence are what the fee-only planner brings.

"Clients are paying me to make sure they don't do themselves harm, first. After that, the task is to beat the benchmarks. While everyone talks about performance, surveys show that it's way down the list of things most important to clients--- confidentiality, location, integrity, and communication all rank higher than performance.", Mr. White observed.

Mr. White has solved the expense problem for HIS clients but most people don't have $1 million and face fees that range from 2 to 3 percent a year. While marketers of wrap accounts and other fee based advisory services claim costs are offset by superior performance and individual service, the cost burden is high enough that passive investing in index funds is a highly competitive alternative. With index funds commonly managed for 0.6 percent and available as low as 0.2 percent through Vanguard, fee based advisors can "recoup" some of the cost of their own fees by opting for less expensive funds.

Impossible, you say?

The mutual fund industry has shared little of the vast increase in fee revenues over the last 15 years. Before January, 1982 there were 347 equity funds and 138 fixed income funds. Those funds currently have average expense ratios of 1.17 percent and 0.86 percent, respectively. Since then, 3011 new equity funds and 3,283 fixed income funds have been formed with average expense ratios of 1.53 percent and 1.01 percent, respectively.

The ten-fold increase in the number of funds has been fed by one of the best markets for stocks AND bonds in history and relative insensitivity to rising charges. The fund business has been VERY profitable.

The rising number of funds also means that if financial planners and advisors want to collect their 1.0 to 1.5 percent for helping small investors organize their investments and make decisions, they can offset THEIR expense by careful choices of funds and/or individual securities. The table below shows sources of expense small investors face in a typical "wrap" account relationship using mutual funds. Assuming 1 percent to the advisor and a 60/40 stocks/bonds split in which the average cost is 1.3 percent, the total cost would be 2.3 percent a year. From that level, costs can be reduced in several steps:

   1) The advisor can reduce costs to 2.0 percent simply by "rolling back"            fund costs to the pre-1982 level. There is no economic reason to justify            current cost levels.

    2)  Substitute fixed income index funds for managed index funds. As a            group, fixed income funds have been a disappointment. Many have            managed to dissipate investor principal in a rising market. New            cost: 1.8 percent.

    3) Use individual fixed income securities to eliminate fixed income fund            management costs. Arranged in a "ladder" of different maturities, there            is virtually no cost, great stability of income and principal. New cost:            less than 1.75 percent.

      4)  Use a broad array of index funds. Since 90 percent of investment             returns are from asset allocation, that's where the effort should be. New              cost: about 1.55 percent. Dimensional Fund Advisors is based on exactly             this principal--- individual advisors and a family of 21 "asset class"             funds.

      5) Use the least expensive index funds. While this reduces asset choices,              many are irrelevant to all but the largest portfolios. New cost: about 1.20              percent.

Costs, in other words, could be cut by as much as 1.1 percent a year. By making such trade-offs, the fee based financial planner can reduce the total cost of management to the level of the average asset allocation fund while delivering the personal contact, communication, and convenience many investors seek... and some NEED... over an impersonal, unguided choice of 6,782 mutual funds.

HOW A FEE BASED ADVISOR CAN REDUCE SERVICE COSTS.

In a year where both equity and fixed income funds have soared in value, investors are unlikely to think about niggling changes in expenses. But there will, inevitably, be more years like 1994 and more years that approximate the lower returns of the long term averages. While a 1 percent a year difference may seem like a small amount, the average annual performance DIFFERENCE, over 10 years, between the 50th percentile and the 25th percentile balanced fund is only 0.7 percent; from 50th percentile to 10th percentile is only 1.10 percent.

In the new, highly measured, highly reported, fee-based world, the only reliable way the advisor can avoid poor performance is to cut fees.