How The Mutual Fund Industry Eats Your Lunch.

And since we've spent time this week discussing how mutual funds are hearing the foot falls of ETFs in the distance I've come across this timely article from Canada's Globe & Mail:  {Excerpt with my highlights.  One note here.  The author is talking in the article about mutual funds sold in Canada.  However most of the principles discussed here apply to the US as well.}

 ....Securities regulators have opened a discussion on the fees investors pay advisers who sell them mutual funds, and this presents a perfect opportunity to raise overall fee awareness.

One way to do this is to analyze the current extent to which investors understand and engage on the cost of investing. There are two themes at play here, one of them being the way in which the mutual fund industry has infantilized investors by hiding the cost of investing. The other is the willingness of investors to uncritically accept the fund industry’s fictional world of zero-cost investing. This is pure laziness and it borders on negligence.

The mutual fund industry dines off your ignorance. It has created a structure where the fees charged to run mutual funds include a very large chunk that is directed by fund companies to advisers who sell funds and their firms. All fund fees are scooped off the top of fund returns, and the net amount is what appears in fund company literature and on third-party data websites like Globeinvestor.com.....

The fund industry turned advisers into their sales arm, and rewarded them with a compensation system that kept inattentive investors from ever encountering fees. But advisers sold their souls in this transaction. In allowing people to think there’s no cost to advice, they made it possible to also think there’s no value to it......

....Advisers themselves are another obstacle to greater fee transparency, although more and more are moving on their own to professionalize what they do by improving fee disclosure and integrating financial planning into their practices. Laggards should ultimately lose the right to call themselves advisers.

Still another hurdle is you, the investor. You can be half to two-thirds excused for your fee ignorance because of the way you’ve been manipulated by the investing industry. But let’s get real. Do you really imagine that advisers, with all the costs of running a business, can afford to handle your financial affairs for nothing? Have you found any accountants that do your taxes for free, or any lawyers who do the legal work on home sales and purchases at no cost?

Expect to pay for good financial advice, whether it’s through trailing commissions, through a percentage fee based on your account size or through a flat or hourly fee. The flat or hourly fee model is the ultimate in transparency, but it won’t get serious traction in the marketplace until people stop being gobsmacked by the very sensible idea of paying out of pocket for financial advice......

For more personal finance coverage,  you can follow the author on Twitter (@rcarrick) and Facebook (Rob Carrick).

Link:  How the Mutual Fund Industry Eats Your Lunch.