The Most Criticized Issue
Throughout the investment industry fees are charged and divided up in complicated ways. Who gets paid and how much is almost impossible to figure out.
The most criticized issue is investment management fees and expenses.¹ Management fees are charged by the mutual fund company for managing the fund’s portfolio of securities. The fund company may rebate a portion of its management fee‚ as a revenue sharing source‚ and typically this type of rebate is not disclosed in the prospectus.
The way business is done in the mutual fund industry is to add fees to the traditional mutual funds in order to compensate intermediaries for distributing the funds. This practice is referred to as revenue sharing.
Gregory Kasten‚ President and CEO Unified Trust Company‚ describes this practice as pay to play. “The mutual fund is making a payment – sort of a pay to play type of arrangement...” ²
The most common form of revenue sharing is 12b-1 fees which are included as part of the fund’s expense associated with marketing and distribution. The fee is deducted from the fund’s assets and can range from 20 to 125 basis points (bps); e.g.‚ 100 bps equals 1 percent.
Eliminating the Abusive Practice of Revenue Sharing
Instead of adding funds which pay for services through revenue sharing‚ pay for services on a fee-only basis and exclude funds which tack on revenue sharing fees to the fund’s management expense. That’s the only way to avoid hidden fees and kickbacks. “Fees can make the difference between having a comfortable nest egg and joining the ranks of the elder unemployed.” ³