| Mutual funds have received a lot of press over | | | | about 1.00%. 12b-1 trailers are used to |
| the past year. Much of it has been bad. Brokers | | | | compensate brokers for service provided to fund |
| have been accused of a failure to disclose their | | | | shareholders at the time of a purchase of fund |
| compensation arrangements to customers. Other | | | | shares or for administrative and advice services |
| firms have been accused of allowing favored | | | | provided to the shareholder after the initial |
| clients to time their investments to the detriment | | | | purchase. |
| of small shareholders. These are among the higher | | | | Sales Loads |
| profile problems with mutual funds. The more | | | | While A shares have lower 12b-1 fees, they |
| fundamental problem is the persistence of a | | | | charge sales loads of between 3% and 6% to |
| bloated cost structure. Yet there is a wide | | | | new investors. This is an explicit cost deducted |
| divergence of expenses among mutual fund | | | | from the initial investment. While it does not |
| options - with a decided advantage going to index | | | | affect the stated performance of Class A shares, |
| funds. This article will identify and explain the cost | | | | the cost is nevertheless born by the investor. |
| components of fund management. | | | | Class B shares have a deferred sales load that |
| Indirect Costs | | | | gradually decreases to zero within 7 to 10 years. |
| Management fees are the cost that most | | | | It typically starts at 5% to 7% and dissipates |
| investors have general familiarity with. This is a | | | | thereafter. Investors are sold B shares in lieu of A |
| fee charged by a fund's investment adviser for | | | | shares as "all their money goes to work |
| managing the fund's portfolio of securities and | | | | immediately". However, B shares lock in the |
| providing related services. | | | | investor for a prolonged period during which time |
| A second component is administrative or "Other" | | | | substantial 12b-1 charges are levied. Overall B |
| Expenses. These expenses include, for example, | | | | shares are the most expensive way to invest. |
| fees paid to a fund's transfer agent for providing | | | | Index Funds are Cheaper |
| fund shareholder services, such as toll-free phone | | | | Index funds, available to direct investors and |
| communications, computerized account services, | | | | fee-only advisors, offer the best value. As they |
| website services, recordkeeping, printing, and | | | | do not involve active management, their |
| mailing. | | | | management and administrative fees are much |
| Recent survey information from the investment | | | | lower (usually less than 0.30% annually). As there |
| company institute indicates that these indirect | | | | is no sales agent to compensate, they are free |
| costs amount to 1.35% annually for equity mutual | | | | of distribution fees and sales charges as well. |
| funds. | | | | Over the course of a ten-year holding period, an |
| Distribution Fees | | | | indexed equity fund will accumulate nearly 20% |
| An additional cost center exists for classes of | | | | more wealth than a similar fund sold through a |
| mutual funds sold through broker - dealers. Funds | | | | broker. The cost advantage of index funds |
| sold through this channel have distribution charges | | | | compounds over time. Small differences can |
| known as 12b-1 fees deducted on an ongoing | | | | exert a greater and greater effect as one's |
| basis. Class A shares typically charge 0.25% in | | | | investment horizon expands. |
| 12b-1 fees while class B and C shares are usually | | | | |