Read some mutual fund ads, and you'll get the impression that the companies and managers are trying to make you as rich as they can. Many of them, though, are actually pocketing a good chunk of your change -- via fees.
According to a BusinessWeek article, "The annual fees charged by fund companies have barely budged, even though assets have increased eleven-fold since 1989, to more than $6 trillion." If this information doesn't make you furrow your brow or grimace, think about it again: If a fund takes in and manages twice as much money now as it did 10 years ago, running the fund shouldn't cost twice as much. The fund won't necessarily need twice as many analysts. It shouldn't need twice as much office space, electricity, Post-Its, and Styrofoam cups. So why is it taking in twice as much money in fees? The most likely answer: Because it can.
At FundAlarm.com, Roy Weitz expressed outrage on this topic. He cited data from Morningstar.com: "Hello? Independent fund directors? Has anyone heard about economies of scale? In 1989, American Century Ultra
You might look at a fund's 1.10% annual fee and think that it's not such a big deal. But Lipper analyst Tom Roseen noted that funds often lose between 40% and 60% of their total return to various fees, charges, and taxes. Worse, some fees are even more counterproductive. The 12(b)-1 fee, for example, supports marketing expenses for a fund -- but marketing a fund means trying to bring in more money. Since the managers' best ideas are surely limited, more money will make it harder for the managers to perform well.
Fortunately, the trend in fees is downward, at least a little, because of competition and regulation. Even Vanguard, which has long sported some extremely low expense ratios, is going to offer even lower rates to more investors -- as low as 0.09% for its flagship Vanguard Index Trust 500 Fund
One good strategy for mutual fund investors, given the state of expense fees these days, is to make sure you're investing in top-notch funds. Anything less will mean that the fees eat up a greater percentage of the total return.
Learn more about maximizing your mutual fund performance in these articles:
- The Case for Mutual Funds
- Slam-Dunk Mutual Funds
- You're Paying How Much?
- Champion Funds Still Beating the Market
- 3 Reasons to Sell
- Is It Time to Sell?
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Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.