The Many Ways Your Mutual Fund Can Overcharge You

Why you have to watch your broker like a hawk.

Jun 28, 2014 at 10:25AM

Millions of investors use mutual funds in their investing. Yet whether you own mutual funds directly through fund companies, use a broker to buy them for you, or own them in a 401(k) plan or other retirement account, it's important to understand the costs that mutual funds charge. Otherwise, you could end up being a victim by paying fees you shouldn't owe.

Mutual Fund

Recently, the Merrill Lynch division of Bank of America (NYSE:BAC) agree to pay fines of $8 million and reimburse a total of $89 million to customers to settle allegations from the Financial Industry Regulatory Authority about overcharging on mutual funds. The case gives just one example of how financial institutions can end up charging you more than you should pay if you're not careful.

What the allegations were
In its alleged facts, FINRA set out what it believes Merrill Lynch did. Under Merrill Lynch's mutual fund platform, the brokerage firm typically charges various fees and sales loads for certain classes of shares, including upfront sales loads for Class A shares. If you're a retail customer, you'll pay these charges in order to buy Class A shares, which typically have lower ongoing annual expenses than other classes of mutual funds.

Cash

Many financial institutions have special agreements with corporate customers who have workplace retirement accounts. Under those agreements, the financial institution agrees not to charge the typical upfront sales charge for retirement-plan mutual fund purchases, instead waiving those fees and giving participants access Class A shares without a load. FINRA alleges, though, that Merrill Lynch didn't actually waive those fees, instead charging workers at 41,000 small businesses and 6,800 charities more than they should have paid. The overages either happened by charging the normal sales loads on Class A shares, or by shunting those customers into other classes of shares that didn't have an upfront load but did have higher ongoing expenses.

Even worse, FINRA says that Merrill Lynch knew about the bad behavior as early as 2006. Yet it didn't take action to fix the problem until more than five years later, instead counting on inadequately supervised financial-advisor personnel to implement fee waivers correctly. In the settlement, Merrill Lynch didn't admit or deny FINRA's charges, but the broker gave consent to FINRA's findings.

What you should watch out for
Unfortunately, mutual-fund investors need to know what they're entitled to. The easiest way to avoid problems is to stick with no-load mutual-fund providers, as they don't charge sales fees at all and only have the annual expenses of fund management for you to pay.

If you're going to stick with funds that charge sales loads, though, here are some warning signs to look out for:

  • You should never have to pay new sales loads on fund exchanges. Most fund families have agreements that allow in-family exchanges with no extra load.
  • Be aware of sales-load breakpoints. In many cases, if you make purchases above a certain dollar amount within a given period, your percentage sales load will be reduced. But especially if you make purchases in multiple transactions, many brokers won't automatically keep track of those breakpoints for you.
  • Make sure your fund changes classes on schedule. In many cases, if you buy Class B or C shares, they'll eventually convert to lower-expense Class A shares after a given number of years. Be familiar with the prospectus, and when that time comes, make sure your broker follows through on that promise.

Mutual funds can make investing a lot easier, but they still come with pitfalls for the unwary. It's important to keep an eye on the investment professionals who help you make the most of your money to ensure that they aren't taking unfair advantage of you.

Bank of America + Apple? This device makes it possible.
Apple
recently recruited a secret-development "dream team" to guarantee that its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are even claiming that its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts that 485 million of these devices will be sold per year. But one small company makes this gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and to see Apple's newest smart gizmo, just click here!

Dan Caplinger owns shares of Apple and warrants on Bank of America. The Motley Fool recommends and owns shares of Apple and Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers