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Investors Continue to Throw Money Away

By: Investor Solutions

By: Investor Solutions, Inc.

Retail investors will overpay an astounding $36 billion this year in mutual fund fees. These are the findings of a study conducted by IndexFunds.com. The purpose of the study was to determine whether or not individual investors were paying competitive fees for actively managed funds. Well, they’re not! But, all of us could have probably guessed that before.

The study shows that the average fund expense ratio was 1.26% compared to 0.29 for selected benchmark funds. The difference, roughly 1%, blows up to an exorbitant $36 billion a year on $3.7 trillion worth of investments. That’s no chump change. Think of all the extra hazelnut lattes that could buy at Starbucks!

Number of funds considered in study 8,545

Dollar amount of total investments $3,738,342,970,000

Actual fees paid $46,967,540,861

Average expense ratio (annual) 1.26%

Average expense ratio for benchmark fund 0.29%

Unnecessary expense (difference) 0.97%

Projected dollars wasted $36,188,973,586

The study examined over 8,500 funds, divided into 41 investment categories. For each category a low-fee benchmark was selected for comparison. An estimate of the actual fees expected to be paid for 2000 were calculated by multiplying the assets of the funds by the annual expense ratio. The results were compared to benchmarks in the same fund category. The difference between the two is the amount investors are expected to overpay this year.

Although the study began with a universe of over 10,000 mutual funds, the sample group was filtered to eliminate: any fund that was not open to new investors, institutional funds, funds open less than one year, and funds without assets.

Previous risk reward studies indicate that investors are paying too much for what they’re getting. On average, investors in funds with lower fees earn better returns than investors in fund with higher fees, due to the fact that lower fees are being deducted from gross returns.

What does this mean for you and me? There is an overwhelming amount of evidence that shows there’s just no reliable, consistent strategy for beating a market or asset class return. The case for active management having been destroyed, it’s amazing people are still chasing illusions. Why people continue paying for fund managers is beyond me. I guess they just have money to waste, oh&say $36 billion or so!