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.
In Mamudi’s article, it’s noted that Karen Dolan, director of fund analysis at Morningstar, and the people at Morningstar have “long been advocates of performance-based fees.” She believes that it would be better to have performance-based fees on periods extending three, five or seven years. Additionally, Dolan suggests the dollar amount brought in by fees be expressed in fund total returns so investors would know how much fees affected the returns.
This could be one more factor that drives investors away from mutual funds and sends them over to ETFs, where there’s transparency and lower fees. Investors won’t be too thrilled to learn that on top of suffering huge losses in the financial crisis, mutual funds still raked in the cash. [Why ETFs are taking market share.]
For more information on mutual funds, visit our mutual funds category.
Max Chen contributed to this article.