There is no longer any question that mutual funds have proved their value to more than 90 million Americans who have invested almost $10 trillion in funds for a variety of reasons.
There is no longer any question that mutual funds have proved their value to more than 90 million Americans who have invested almost $10 trillion in funds for a variety of reasons.
Although the Supreme Court has agreed to weigh in on the subject of advisory fees charged to fund shareholders, it is important that the issues involved are judged on the basis of an apples-to-apples comparison.
For example, investment advisory fees are distinct from “expenses” incurred by mutual funds, which, properly, are charged to fund shareholders.
However, investment advisory fees are (or should be) identical, regardless of the nature of the advisory account, whether a mutual fund or a corporate account.
In addition, accounts with similar, if not identical, investment objectives, strategies, research, etc., are often managed by the same investment professionals, which, effectively, should reduce the aggregate advisory fee.
It is also important to recognize that expenses incurred by mutual funds on behalf of shareholders are charged to the fund and its shareholders as separate line-item costs, which are often separately contracted.
Invalid comparison
Therefore, any such expenses shouldn't be used in comparing advisory fees for institutional accounts; such a comparison would be completely inappropriate.
Although there are about 8,000 funds available to the public, it should be noted that almost 3,000 are bond funds and money market funds, advisory fees for which are invariably lower than those of traditional, equity type funds.
But the reduction or waiver of advisory fees since the market meltdown has been an attempt by fund companies to remain competitive and retain their shareholder base.
Although fund lobbyists and others are quick to boast that fund fees and expenses have declined by more than 56% since the 1980s, that contention is valid only if money fund fees are factored out of advisory fees and 12(b)-1 fees are excluded. That effectively transfers a minimum of 25 basis points in expenses/fees from the investment adviser to the shareholders of a fund.
No coincidence
In this respect, it is no coincidence that money market funds first gained popularity, and 12(b)-1 fees were first implemented, in the early 1980s.
Since then, we indeed have seen significant declines in fees and expenses.
Finally, the contention that shareholders are free to move to another, less costly fund at any time overlooks two facts:
The initial purchase of a fund probably incurred sales charges, and another charge is likely when buying a different fund. At the same time, the sale of a fund is likely to trigger a taxable event.
Both factors effectively penalize cost-conscious investors — which is simply unfair.
Dan Calabria, now retired, worked for and led several firms during a 42-year career in the mutual fund industry. He began his fund career at Dreyfus Funds and moved on to become executive vice president of Oppenheimer Management Corp. and a limited partner of Oppenheimer & Co. Inc.
