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Have you ever been “fielded” to death? This is probably happening to you right now by the mutual fund industry, and you don’t even know it. Worst part: The charges are deceptive, and you probably wouldn’t pay them if you knew the truth.
The fee game involves the “feed” being whipped to death by the mutual fund industry, which 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. Its really smart for the mutual fund industry to do so. 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 a minuscule 1%. So the investor is thinking “Oh, wow, it’s only 1%, it’s short for all the services.”
As the mutual fund industry has grown over the past 20 years, they manage more and more money; $10 trillion today, that comes to $500 billion in potential fees per year. That small fee, shown as a percentage of assets under management, never seemed so big. This is one of the main reasons why investors think, “Oh wow, it’s cheap and not that much” when in fact, it’s very expensive. Seemingly small percentages, added up and compounded over time, make a big difference to your investments. Every unnecessary recurring investment expense cuts deeply into your returns.
A more uniform fee would be a percentage of income or a percentage of performance. So if the fund makes its client’s money grow by 10%, it will charge a fee for performance and not a fee for assets under management. If it loses 40%, there will be a negative fee for performance. This will provide a very accurate, complete fee structure; However, the mutual fund industry would never do this because it would cut into their profits and show customers the truth, that the fees are very, very expensive, and they are no good at growing your money.
There are also fees that you may not see or know about. One of these is called direct brokerage charges. This is how mutual fund companies make exorbitant payments to their “preferred brokers”. These preferred brokers are organizations that help the mutual fund industry sell and market their funds. So mutual funds rotate and trade with them at an inflated rate. Basically, they are paying a higher rate than they are willing to pay.
Then there is what is called the principal-agent problem. This means that the agent’s focus is not on what is best for their client, but on what is best for the agent. What applies here is that they are not getting the best price for you. Instead of getting the best trading price the public can get, they are giving business to a company based on how successful they are at marketing to you, the investor.
Here’s an example: In 2001, when the mutual fund industry was much smaller than it is today, America Funds, one of the world’s largest fund companies, paid $34 in direct brokerage fees. The brokers who received these fees were selected purely because of their “excellence” in marketing their funds to investors. This is an additional $34 million that he paid to organizations that helped sell his funds. This is a hidden fee that mutual fund companies don’t disclose for exactly what it is: a sales commission.
Paying these amounts as brokerage commission is completely bogus, but they do so because it puts their fund at the top of a list, a list that your ‘financial advisor’ will promote to you. While this appears on the books in such a way that it looks like a cost of conducting a stock transaction, it is actually a form of sales incentive that customers end up paying for in order for the mutual fund to be sold to them. Brokers who sell the most mutual funds receive a disproportionately large percentage.
The mutual fund industry calls this a brokerage commission, but it is actually 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 that your future is not just another pawn on the chess table. The first step to taking control of your financial future is to begin to understand the myths that have you gripped.
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