Taxonomy of Mutual Fund Fees, Expenses and Costs

The variety and sometime abstruseness of mutual fund fees and expenses suggest that fund manager incentives do not always align with the interest of fund investors in net return. In an April 2011 update entitled “Mutual Funds: Revised New Total Expense Ratio and Costs with Soft-Dollar Commissions and Rebates”, John Haslem notes that the SEC “regulatory scheme of expense ratio disclosure is short on transparency and long on opaque” and offers an alternative taxonomy of mutual fund costs intended to be transparent for investors. As described in the article, the categories/elements and typical magnitudes of annual fund expenses are:

• Fund management fees (typically 1.01% of fund assets)
  • Investment advisory fees
  • Revenue sharing payments (indirect distribution fees)
  • Fund service provider fees (administrator, underwriter, custodian, transfer agent, auditor, legal, directors)
• Fund distribution fees (typically 0.26% of fund assets)
  • Selling group payments (to brokers)
  • Distributor payments and fees

• Fund trading costs (typically 0.78% of fund assets)
  • Commissions, bid-ask spreads and impact of trading
  • Soft dollar trading costs
  • Discretionary trading costs
  • Flow-induced trading costs

The typical total annual fund expense is about 2% of assets.

The article defines and discusses each category and element of expenses, fees and costs. Some focus on growing assets under management (and thereby fund manager revenue), but such growth is arguably at odds with exploiting a limited opportunity set related to fund manager expertise.

In evaluating mutual funds, investors may want to consider all these fees, expenses and costs debited from fund assets as evidence of fund manager emphasis on outcomes other than maximizing net return.

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