Please donate any amount you can to keep this site going and free. We appreciate all of your contributions! :)

Wednesday, September 2, 2009

The Truth About Mutual Fund Fees

Have you ever been "fee'd" to death? It's probably happening to you right now by the mutual fund industry, and you don't even know it. The worst part: the fees are deceptive, and you probably wouldn't pay them if you knew the truth.

The fee game involves getting "fee'd" to death by the mutual fund industry, what I like to call the "industrial-investment complex."

Here's some background: The fee that is charged is always presented as a percentage of assets under management. It's really smart for the mutual fund industry to do this. If they're managing a thousand dollars and their fee is 1 %, they're going to get $10. But if they're managing a billion dollars, the fee for assets under management is still the same percentage. It's still that small 1%. So the investor is thinking "Oh, wow, that's only 1%, that's small for all that service."

As the mutual fund industry has grown over the past 20 years, they manage more and more money; $10 trillion today, which comes to $500 billion in potential fees each year. That small fee that's shown as a percent of assets under management never looks that large. That's a main reason why investors think, "Oh wow, this is cheap and not that much" when, in fact, it's very expensive. Seemingly small percentages, added up and compounded over time, make a huge difference for your investments. Every unnecessary investment expense that recurs time and time again cuts deeply into your returns.

A much more equitable fee would be a percentage of income, or a percentage of performance. So if the fund grows its client's money 10%, it would charge the fee to performance and not the fee for assets under management. If it loses 40%, there would be a negative fee to performance. This would give a very accurate, absolute fee structure; however, the mutual fund industry would never do this because it would cut into their profits and show clients the truth, which is that fees are very, very expensive, and they are not good at growing your money.

There are also fees that you probably don't even see or know about. One of these is called the direct brokerage fee. This is how mutual fund companies pay inflated trading costs to their "preferred brokers." These preferred brokers are organizations that help the mutual fund industry sell and market their funds. So the mutual funds turn around and do business with them at an inflated rate. Basically, they're paying a higher rate than they have to.

Then there's what's called the principal-agent problem. This means the agent's attention is not on what is best for their client, but on what is best for the agent. What applies here is that they're not getting the best price for you. Instead of getting the best trading price that the public could get, they're giving business to a company based on how well they succeed at marketing to you, the investor.

Here's an example: In 2001, when the mutual fund industry was a lot smaller than it is today, America Funds, one of the largest fund companies in the world, paid out $34 dollars in direct brokerage fees. The brokers receiving these fees were selected purely because of "excellence" at marketing their funds to investors. That's an extra $34 million they paid out to organizations that helped sell their funds. That's a hidden fee that the mutual fund companies absolutely do not have to disclose for what it truly is: a sales commission.

It's completely bogus to pay these sums as brokerage commissions, but they do because it puts their funds at the top of a list, a list that your 'financial advisor' will promote to you. While this shows up on the books in such a way that it looks like the cost of conducting stock transactions, it's really a form of sales incentive that the clients end up paying for so that the mutual funds get sold to them. The brokers who sell the most mutual funds get a disproportionately large percentage.

The mutual fund industry calls this a brokerage commission, but it's really a sales commission. These are not investment companies; these are sales organizations masquerading as investment companies. What they are selling and trading is your future. You have to do something about it so your future isn't another pawn on a chess table. The first step in taking control of your financial future is to begin to understand the myths that are holding you back.

courtesy of

No comments:

Post a Comment