Mutual funds support an enormous industry, and all elements take their cut.
On the periphery of the companies that create and manage mutual funds, a whole industry has sprouted up that provides information and services to investors. These include; custodians to hold the funds, sales and wholesaling organizations to distribute and market funds, law firms specializing in mutual funds, accounting and reporting firms, mutual fund ratings services, and mutual fund newsletters, just to name a few.
A river of money flows through the mutual fund industry, supporting hundreds of thousands of jobs and creating substantial profits for the companies involved. When any industry becomes this well entrenched in an economy and the profits are as large as they are, it invites not only greater efficiencies, but also potentially ruinous competition in the long run.
Educated investors and US government regulators are starting to take a hard look at the industry and what goes on behind the scenes of mutual funds.
Let's start to take a closer look at one of the issues; expenses. Expenses can be much higher than you think. An investor's goal is to keep as many dollars as possible. To do that, investors must keep expenses as low as possible and total returns as high as possible. Two types of expenses work against an investor's goals: stated and unstated. Together, they produce a formidable obstacle for growing wealth.
Stated expenses are listed in a mutual fund's prospectus. Most investors know to check the expense ratio of a fund to determine the stated costs. According to the Investment Company Institute, the average expense ratio in an equity mutual fund is 1.4 percent per year. Remember that this is the average, many are substantially higher (especially in smaller funds, where there are fewer investors to share those costs).
The higher the expense ratio, the less the investor stands to gain. Unstated expenses are more difficult to quantify and not required by law to be disclosed (yet). Like an iceberg, the unstated costs below the waterline may dwarf the stated costs that are easily visible above.
Next week, I'll go further into these issues, including trading costs. If you would like to learn more about your own stated and unstated expenses, give us a call.
Investment advisory services offered through Gradient Advisors, LLC (Arden Hills, MN 877-885-0508), a SEC Registered Investment Advisor. Gradient Advisors, LLC and its advisors do not render tax, legal, or accounting advice. Wolf Investment Advisors is not a registered investment advisor and is not an affiliate of Gradient Advisors, LLC