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Study suggests that investors who rely on brokers to invest in mutual funds often pay three times as much in fees. (From time to time, BondsOnline presents articles in our "How Wall Street Works" series that, while maybe not directly related to fixed income investments, have a direct impact on investors).
Nov 30, 2006 Reuters - By Svea Herbst-Bayliss
BOSTON, Nov 30 (Reuters) - When it comes to mutual funds, the saying 'you get what you pay for' is false to the tune of millions of dollars, say researchers who found that brokers often add fees without delivering better returns for clients.
"Brokers are supposed to work for their clients, but when recommending a generic product such as an index fund, they refer their clients to more expensive funds and then collect sales charges to boot," said Mercer Bullard, who helped write the study that was released on Thursday.
Millions of Americans invest their life's savings in the $10 trillion mutual fund industry and many choose funds that mimic an index because these portfolios are supposed to cost less than actively managed funds and often perform better, studies have shown.
This year investors sent billions to a range of index funds, including offerings such as the Vanguard Total Stock Market Index fund, while they have pulled money out of actively managed funds.
Now new research conducted by Edward O'Neal, a professor at Wake Forest University and Bullard, a lawyer who founded the advocacy group Fund Democracy, shows that some investors may be paying extra while receiving nothing in return.
Over time, investors who rely on brokers to buy index funds will pay three times as much in expenses as investors in no- load index funds that do not charge sales fees, the researchers said. "When investors used brokers they paid twice: first, they paid the broker; second, they paid a broker penalty in the form of higher fund fees," O'Neal said.
The study was sponsored by Fund Democracy and Zero Alpha Group, a network of independent investment advisors.
The authors calculated that, on a $10,000 investment over 20 years, investors in broker-sold index funds would pay $7,600 in fund operating expenses, while those in a no-load index fund would pay about $2,500.
The research is being released at a time Americans are being urged to save more for their retirement and many are relying on the help of experts such as brokers.
It also comes as the industry, fresh from a painful trading scandal that cost it billions in assets, faces another investigation where regulators are probing funds that paid kick backs to a firm that offers administrative services to funds.
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