There was a time in the not-so-distant past when mutual funds were not highly regarded. They did provide the average investor with the opportunity to purchase their segment of the stock market with the guidance of a fund manager and comfort of knowing that others felt the same way you did. After all, they were giving this fund their money as well.
But not all investors were thrilled with the arrangement and in the day before the internet, the only way you could find out if your fund was charging too much for their services, was to dig. Not all of us were inclined to do so. We were average investors.
But one man did and challenged the fees charged investors claiming they were disproportionately high when compared to mutual funds invest in by pensions. Gartenburg claimed that fees should be in line with the services rendered and if they weren’t, the fund company was not living up to its fiduciary responsibility.
This led the court to ask if they could make that sort of determination. They wrangled over the subject of arm’s length contracts, redemptions made by mutual fund investors outside of pensions, turnover, regulatory hurdles, and eventually claimed a previous court had erred when it looked only at disclosure. (You can read the full clarification of Gartenberg here as a pdf.)
Paul Schott, the president of the I.C.I. (the lobby group for the mutual fund industry) responded to the latest adoption of the Gartenberg standard as something that has “well served the interests of funds and fund shareholders, who have seen their cost of investing fall by half in the last 20 years”. Not so fast.
About the only real change in how funds charge money is found in index funds. For most investors, if you are investing in a mutual fund that is owned by a publicly traded company you may not be getting the best deal possible. Institutional investors still pay less even when economies of scale come into play. This doesn’t mean that you should run away from mutual funds (about $11 trillion is invested in this tool) or to buy index funds (although arguments that these funds provide enough of a cost savings to warrant long-term investment is only partly true).
The best lesson is to understand when it comes to all investments, particularly when it comes to mutual funds is to know what you are buying, research those investments, set your goals against the cost of that investment and diversify.
Read Jeff Sommers article on Mutual Fund Fees.
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