Don't Trust the Mutual Fund Industry

Are mutual fund shops less trustworthy than your average auto mechanic?

According to "Measuring Affluent and High-Net-Worth Investor Expectations of the Investment and Financial Community," a recent study commissioned by Barclays Research and carried out by Cogent Research, investors think so. In fact, they rank mutual fund shops below insurance agents and mechanics in terms of trustworthiness.

Apparently, the corporate misdeeds and the failure to protect shareholder interests in recent years have left a lasting impression on investors.

Well-placed suspicion
The survey paints a picture of widespread dissatisfaction with the fund business. An overwhelming 71% of investors don't trust the fund industry, and 66% say fund shops don't take responsibility to protect shareholders' financial interests. That could be a big issue as fund shops at Fidelity, Janus (NYSE: JNS), Schwab (Nasdaq: SCHW), and the like try to increase their assets under management.

According to the study, the biggest source of distrust arises from disclosure -- and lack thereof -- of fees, risks, and tax implications. And only 45% of investors surveyed said they were confident that their investments would be safe in a volatile market.

Investors have good reason to distrust much of the mutual fund industry. Many actively managed mutual funds are run with the goal of enriching company management, not maximizing shareholder return. The spate of market-timing charges that occurred at numerous fund shops in 2003 did a lot to sow discontent among investors. And when hedge funds and larger institutional investors are allowed to profit at the little guy's expense, there's little wonder that investors question fund shops' motives.

Sometimes, it seems as though an individual investor just can't win in this horse race. How can one person succeed when the deck is stacked against you?

Diamonds in the rough
One option is to manage a portfolio of stocks on your own -- assuming you have the time, knowledge, and inclination to research and keep track of a few dozen companies. Or you could simply track the market by investing in broad-market exchange-traded funds such as Diamonds (AMEX: DIA), Cubes (Nasdaq: QQQQ), or the iShares S&P 500 Index (NYSE: IVV). You won't end up beating the market, but at least you won't have to worry about those untrustworthy fund shops!

But although it's true that a lot of mutual funds and mutual fund companies don't have investors' best interests in mind, there are a select few that stand out from the pack -- and actually focus on creating value for shareholders. These are the folks you want to invest with.

Vanguard and Dodge & Cox are two shining examples of fundholder-friendly companies. Other top-notch names, such as T. Rowe Price (Nasdaq: TROW), Royce Funds, and Diamond Hill Investment Group (Nasdaq: DHIL), are also known for their trustworthy ways.

If you want to invest in funds, it's imperative that you invest with the best -- and that's our mission at the Fool's Champion Funds investment service. We research the thousands of funds out there and recommend only those that possess a winning strategy, experienced management, low fees, and trustworthy credentials. If you'd like to see what we've found, a free 30-day trial gives you immediate access to our entire lineup.

Approaching fund investing with a healthy dose of skepticism is not a bad thing. There are funds and fund companies you should avoid like the plague, but there are also a surprising number of funds that can withstand the strictest investor scrutiny. The key to success lies in separating those two.

Now if only finding a trustworthy auto mechanic were as easy.

Amanda Kish heads up the Fool's Champion Funds newsletter service. At the time of publication, she did not own any of the companies mentioned herein. Schwab is a Stock Advisor recommendation. The Fool's disclosure policy always has your best interests at heart.