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Sue for the Differences
You probably have heard or read numerous reports about mutual fund fees. Everything from soft money to the way they charge for 12(b)1 fees has come under scrutiny by disgruntled investors. But are the mutual funds who deceptively hide these types of charges to blame or is the investor? In cases of lack of savvy, it is the investor or the investor's brokerage firm. In the case of hiding these fees in expenses, it is the mutual fund manager.
The question is why and who should be able to sue for damages (that will ultimately be paid by the remaining shareholders).
Mutual funds have done some underhanded things in an effort to retain shareholders of the public companies many are currently under employment contract with but sometimes show little regard to the folks who have entrusted their investment money. The latest salvo from this disgruntled group comes from shareholders of Morgan Stanley S&P 500 Index funds.
Most everyone is well aware of the king of this group, the Vanguard 500 Index whose fees are at an alluring 0.17%. This however is not the industry average for such funds whose investment style is mostly based on how the Standard & Poors Company, the firm that determines the members of the top 500 companies based on capitalization, picks the list. How the companies rank in this index is broken down by weight. Similarly, index funds also go by weight or weighted averages when determining how much their index will purchase.
In other words, the index basically picks the stocks. The fund collects investor's money and that is basically all there is. So why is the industry average for these types of mutual funds at .50%? Better question is why do investors purchase funds, such as the Morgan Stanley whose class A shares charge investors 0.73% while class B fund holders pay a whopping 1.50% according to Morningstar?
While nothing will save us from ourselves and our ability to read only the parts of the prospectus that appeals the most, there are lawmakers and policy changes in the near distance. The soft money I referred to earlier is still being hidden and the plaintiff who brought the suit according to Barron's is complaining about "research" and justifiably so. Index funds do not need research. Better disclosure of this particularly pesky fee should be unnecessary. Not that we should trust any financial manager implicitly but it would be nice to know without needing regulations that our money is being handled by someone whose concern is primarily mine.
This dual compensation effect although is too tempting and we are too easy a target. If there is money to made on excessive commissions divvied up between the broker and his firm, these suits assume that it will be tried. Creating new regulations creates more information that we are unlikely to read.
If you find yourself buying a mutual fund from a broker, you should ask him/her two questions and yourself one. Ask her/him if they are recommending the fund of interest because they are receiving a fee from the fund company and if there company is receiving a fee for preferable placement of their list of funds.
The question you should ask yourself is much more simple: If you need to ask a broker about how much money they and their firm are making at your expense before you buy the fund (which will charge you again since many funds offered by brokerages come with load fees as well), why are you buying what is widely available without their help?
Oh, and read the prospectus! If you don't understand what your fund information is telling you, you can write and we will discuss your problem.
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