As scandals swirl around many mutual fund families, various practices of mutual funds are also coming under scrutiny. One common criticism these days is that mutual fund fees, in general, are too high. The topic, not surprisingly, is viewed differently by various parties.
Many mutual fund companies explain that they intentionally lower fees once funds grow to certain sizes. This makes sense -- because as funds take in additional millions or billions of dollars, their administrative needs don't increase proportionately. If a $1 billion fund has 20 stock analysts scouring the markets for worthy investments, it isn't likely to need 200 stock analysts when it's a $10 billion fund. Still, one wonders whether the voluntary fee reductions are going far enough. And not every growing fund has been lowering its fees.
The Investment Company Institute (ICI), the trade organization for the mutual fund industry, recently pointed out the results of a study it did. It concluded that many mutual fund fees are tied to fees paid to "sub-advisors," a practice similar to what pension funds do. It found all this quite reasonable.
Meanwhile, others, such as that pesky (but admirable) New York State Attorney General Eliot Spitzer, took issue with the ICI. Spitzer noted, for example, that only 20% of funds that paid sub-advisor fees were examined in the study.
Philadelphia Inquirer columnist Jeff Brown also criticized the ICI report, calling the pension fund analogy "a red herring." He points out that there are many funds that charge much less than average and turn in very good results -- citing the Vanguard company as one example. He then drives home a message that we at the Fool have long championed: that most managed stock funds don't fare as well as simple index funds (which generally sport low fees).
We'll have to stay tuned to see what becomes of mutual fund fees, but there's plenty of activity suggesting that they may end up reduced.
Learn more about mutual funds in general and index funds in particular in our Mutual Fund center. And check out our How-to Guide, "How to Pick the Best Mutual Funds," too. It earned rave reviews and comes with a money-back guarantee.