How Much Are You Really Paying for That Fund?

When is the price on a product not the “real” price you pay?

Can you imagine entering a store, comparison shop, select your product, and then find out at the register that the price highlighted on the product is not the real price you pay. How would you feel? Probably find another store, right?

What if this pricing racket was going on within almost every store carrying these products? Think about calling The Better Business Bureau, perhaps? Well, what do you think happens when you buy a widely marketed product on Wall Street? What product? Mutual funds.

Do you really know just how much you are paying for your mutual funds? Really?

Let’s navigate into the swamp of 12b-1 fees. The Financial Times shines some flood lights on this “racket” in writing, Hidden Fees Will Lead Funds to Their OK Corral,

 . . . the SEC already has a proposed rule aimed at the juicy target of 12b-1 fees.

It is hard to defend these charges, which managers deduct from a mutual fund’s asset pool to cover their sales and marketing expenses – the equivalent of a cinema tacking pennies on to your ticket price to pay for the movie posters.

The rule would not do away with these sales charges, which many investors have no idea they are paying, but instead would partly rein them in, mandate clearer disclosure, and loosen restraints that limit brokerages from lowering sales fees. Even those modest reforms had the fund industry’s lobby hissing, possibly one reason the SEC has done little on the proposal since 2010.

Meanwhile, the rule would leave intact other dubious ways managers are allowed to disguise fund costs, thanks to the SEC’s warped reliance on disclosure as a fix for almost everything.

The sad list includes mutual funds and their brokerage partners masking the cost of sales commissions or “loads” by stretching them for years into an “ongoing” charge, or trapping them at the back-end when investors exit the fund. There also are the ankle-biters – the purchase fee on investors buying in; redemption fee on investors selling off; account fee, often just for routine administration; and a shareholder service fee for pesky investors who call with questions.

Then tack on sometimes hefty trading costs, which most managers hide deep in fund documents.

Most account statements also have no clear summary of charges, because funds usually deduct these expenses from the pooled assets, forcing investors to consult a prospectus, calculator and abacus.

They may still not come close to what the fund is indirectly charging them, in the worst cases on the order of 4 per cent expense ratios and 8 per cent sales loads.

Asset management – including its sales and administrative functions – is a valuable service. Why have such a rogues’ gallery of charges instead of a “here-is-the-cost-to-run-and-sell-this-fund” line on the quarterly statement?

Either fund managers and their distributors, as a group, are afraid to stand by their products’ true costs, or they need to mislead investors to keep their business.

Mislead investors . . . still? That’s not good.

Perhaps you may want to ask your brokers and advisers to provide a detailed listing of  all the costs, fees, loads, charges, expenses, assessments, commissions, (did I say fees?) on the funds they have sold you.

Once again . . . buyer beware!!

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

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