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The Fund Industry: How Your Money is Managed, 2nd Edition by Robert Pozen, Theresa Hamacher

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CHAPTER 5

The Cost of Fund Ownership

As we've seen in the preceding chapters, mutual funds have many advantages for investors. They allow individuals to diversify their portfolios and to enjoy the benefits of professional management—while knowing that they can sell their shares at any time and that their investment is being carefully monitored by independent directors and overseen by regulators.

But all of these advantages come at a cost. Investors pay fees for the services that mutual funds offer. They almost always pay a fee for investment management and administrative services—usually expressed as a percentage of the assets in the portfolio—and they often pay other fees as well, which may include a sales load paid at the time that the shares are purchased, commissions on trading stocks in the fund portfolio, and an annual fee for maintaining certain types of accounts.

Here we take a close look at all of the fees that shareholders pay—and the controversy surrounding them. In this chapter, we'll:

  • Provide an overview of fund expenses, discussing why they matter, what charges shareholders pay and to whom, and how they are disclosed to investors.
  • Take a closer look at distribution fees, which are fees paid to intermediaries for selling fund shares, and explain the share class structure.
  • Review fund operating expenses, related to securities transactions, shareholder transactions, and fund services.
  • Discuss the controversy over the level of the management fee.
  • Focus on one aspect ...

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