Have you ever been “fee’d” to death? You’re probably going through the mutual fund industry right now, and you don’t even know it. The worst part: the rates are misleading and you probably wouldn’t pay them if you knew the truth.
The fee game is about being “paid” to death by the mutual fund industry, what I like to call the “industrial investment complex.”
Here’s some background: The fee charged is always presented as a percentage of assets under management. It’s very smart for the mutual fund industry to do this. If they manage a thousand dollars and their fee is 1%, they will get $10. But if they manage a billion dollars, the fee for the assets managed is still the same percentage. It’s still that little 1%. So the investor is thinking, “Oh wow, that’s just 1%, that’s not enough for all that service.”
As the mutual fund industry has grown in the last 20 years, they manage more and more money; $10 trillion today, which equates to $500 billion in potential fees every year. That little fee shown as a percentage of managed assets never seems that big. That’s one of the main reasons why investors think, “Wow, this is cheap and not that cheap” when, in fact, it is very expensive. Seemingly small percentages, added up and compounded over time, make a big difference to your investments. Every unnecessary investment expense that is repeated over and over again has a profound impact on your profits.
A much more equitable fee would be a percentage of revenue or a percentage of performance. So if the fund increases your client’s money by 10%, you would charge the performance fee and not the assets under management fee. If you lose 40%, there would be a negative commission on 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 the fees are very, very expensive and not good for 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 “brokers of choice.” These preferred brokers are organizations that help the mutual fund industry sell and market its funds. So mutual funds turn around and do business with them at an inflated rate. Basically, they are paying a higher rate than what they owe.
Then there is what is called the principal-agent problem. This means that the agent’s focus is not on what is best for his client, but on what is best for the agent. What applies here is that they don’t get the best price for you. Instead of getting the best trading price the public could possibly get, they are giving business to a company based on their success in trading 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 solely for their “excellence” in marketing their funds to investors. That’s an additional $34 million they paid to organizations that helped sell their funds. That’s a hidden fee that mutual fund companies don’t have to disclose at all for what it really is: a sales commission.
It is completely false to pay these sums as brokerage commissions, but they do so because you put your funds at the top of a list, a list that your “financial advisor” will promote to you. While this appears on the books as looking like the cost of transacting stocks, it is actually a form of sales incentive that customers end up paying to have the mutual funds 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 their future. You have to do something about it so that your future is not just another pawn on a chess table. The first step to taking control of your financial future is to begin to understand the myths that are holding you back.