The Total Expense Ratio: The Reality of Distribution Fees—“Behind the Mutual Fund Curtain”

Abstract

This study uses the portion of a new Total Expense Ratio construct that discloses the reality of adviser/distributor payments of hidden distribution fees to sales brokers “behind the mutual fund curtain.” Distribution fees consist of dealer (broker) concessions, account servicing (12b-1 fees), types of revenue sharing payments, and soft-dollar trades. Distribution fees are one of four categories in the Total Expense Ratio, the others being (1) management fees, (2) “other” expenses, and (3) transaction costs. Adoption of the complete Total Expense Ratio with normative transparency of disclosure followed by prohibition of 12b-1 fees, revenue sharing payments, and soft-dollar trading requires strong action by fund independent directors, the fund industry, and most importantly, by Congress and the SEC. Only a few fund advisers are likely to join in this effort to change their very profitable status quo. However, as the article maintains, fund shareholders deserve to receive their “fiduciary protections” under the law and the TER may be useful in this regard.

TOPICS: Mutual funds/passive investing/indexing, legal/regulatory/public policy