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How Much Are You Really Paying for That Fund?

Posted by Larry Doyle on February 4, 2013 8:21 AM |

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!! Navigate accordingly.

Larry Doyle

Isn’t  it time or overtime to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Peter Scannell

    Wait a minute LD, I thought the mutual fund shareholders’ sole advocates, the “independent” fund board directors, had mom and pops back. Are you saying that the directors of these funds would allow the siphoning off of mom and pop (and children’s college funds) savings without raising an eyebrow? I know some “independent’ fund board directors are paid extremely well, they take home between $250,000 and $350,000 a year and with a pension for life after 5 years of service equaling 50% of the director’s best year on the job. Some directors can even take home more if they do some little project for the fund’s shareholders – like investigating themselves.

    But is that enough to sell your soul LD?

    You bet your ass it is!

    Hells bells.

  • Peter Scannell

    Those basis points add up to billions!

    Mutual-fund investors paid about $9.5 billion last year in 12b-1 fees—and if you don’t know what that is, you’re not alone. The Securities and Exchange Commission worries that many people are unaware of or don’t really understand these charges, which are subtracted from fund assets to pay for “distribution” and/or “services.”

    What Exactly Are 12b-1 Fees, Anyway?

  • Peter Scannell

    Investors in mutual funds incur two primary types of expenses and fees: ongoing expenses and sales loads. Ongoing fund expenses cover portfolio management, fund administration, daily fund accounting and pricing, shareholder services (such as call centers and websites), distribution charges known as 12b-1 fees, and other miscellaneous costs of operating the fund.
    The ongoing fund expense of the 12b-1 fee of 25 basis points always remains the same, .25; even though a mutual fund’s share price will increase or decrease every day. There is no list of distribution expenses, stamps, envelopes, etc.

    Funny how all no load mutual fund’s 12b-1 fees add up to exactly .25%. If they charged anymore they could not call themselves “no-load,” which, wink, wink, would mean a sales charge! Under .26% a expense, over .25% a sales charge (tip).

    Consider a 12b-1 fee a tip. Your paying a tip everyone that touches your money in a mutual fund.

    What…you don’t tip the teller in your bank?

    What… you don’t tip the Target salesperson?

    What…you don’t tip the checkout clerk at your supermarket?

    What… you don’t tip the gas station attendant?

    Well the mutual fund shareholder is mighty generous to the mutual fund industry to the tipping tune of about $10,000,000,000. last year.

    • Peter Scannell – you mean “tilting” – yeah?

  • Anyone who believes there is any reality in mutual funds these days is a fool. If you can pull your 401ks out – take the penalty hit and invest in something tangible – even a garden; but don’t leave your hard earned wages sitting in the market. Think of the penalty as the esoteric, bite the bullet and grab your money and run. Remember: “First come – first served” and there is not enough to go around for very long.

    Don’t think judges and politicians aren’t cashing theirs in nice and quietly – compare the years on the financial statements:

    Judicial Financial Disclosures

    Political Financial Disclosures

  • B Finn


    YOU’RE RIGHT !!!!!!!!

    A finanacial advisor who understands risk and can assist clients in finding lower costs alternatives is absolutely! a value added.

  • Rob frm NYC

    Vanguard is the exception to the rule (yes this is a plug for Vanguard). With their index funds, expenses are as low as .06%
    per year (or 6 per $10,000 invested).
    I may not have control over the results, but I can control how much I am willing to have crooks extort from me (I don’t consider Vanguard people to be crooks).
    I have, through trial and error, learned my risk tolerance and adjust my portfolio accordingly. I also by index funds/ETF’s that are cheap and fit my diversified allocation.

  • larry Levin

    How about all those madoff “feeder funds” getting 5% kickbacks?

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