Ouch. It’s no wonder that some investors are turning away from mutual funds in favor of exchange traded funds (ETFs) after they had to pay high management fees for mutual funds that experienced heavy losses during the financial crisis.
While mutual fund investors incurred heavy losses in 2008, managers of some of the largest funds, which may have plummeted about 40%, still gathered millions in fees, remarks Sam Mamudi for MarketWatch. Mutual fund managers accrued large paychecks because mutual funds usually make money based on total assets instead of performance. Still, most of the funds did suffer from the financial crisis since lower assets did diminish their bottom line. [ETFs vs. mutual funds.]
Additionally, some mutual fund companies charged performance adjustment fees, which are based on performances compared to their benchmark and not on absolute returns. Total fees for mutual funds also include third party legal work, customer service and record-keeping. However, the lack of transparency makes it impossible to determine how much of the management fee goes where. [Why more mutual funds are embracing ETFs.]
Fidelity and American Funds made up more than half of Morningstar’s list of 20 largest fee gatherers.