Fund Expenses Expected to Increase in 2009

A timely column by Marketwatch reporter Chuck Jaffe reiterates the importance of watching expenses and provides a sad prediction that mutual funds will be raising their expenses in 2009 despite the decline in market performance and the negative effect this will have on shareholders.

This is more bad news for mutual fund investors.

Aside from the decline in other financial assets, including house prices, every penny paid in higher fee es will add to the recovery time a person's sick financial balance sheet.

But mutual fund companies control their fee structures without any input from their customers. That's part of the "heads I win, tails you lose" game, which is too common in the financial services industry.

Mr. Jaffe does a good job of presenting the latest news. Now, it is up to shareholders to bite the bullet, and accept the higher fees, or else move into any other similar fund or ETF which can provide the same asset class or strategy coverage at a lower cost.

If you find one, make the move. There should not be anything such as customer loyalty in the mutual fund business which is based solely on total net performance.

As discussed in other posts, most mutual funds are commodities. The simple reality is there are are too many similar funds following the same strategies, asset classes, research and charts.

While manager personalities may play a role in the marketing, the reality is that top-tier funds do not stay there long. They rotate on a pretty consistent basis. "Every dog has its day" is a great slogan for portfolio managers and a star today can be a dog tomorrow. Even Morningstar's rating system plays a role in this ongoing charade since 10% of Morningstar's funds in any category have to be rated five-star funds. In education, that is known as grade inflation.

In the world of mutual fund marketing, that is a great gimmick to help sell funds, fund research, and the rights to use Morningstar's rating system in fund advertising.

All this is more reason why shareholders should start monitoring fund expenses, shelf space deals and advisor paid fees. The caveat is that fund companies do not want you to readily discover this information. You have to do a "Where's Waldo" routine using the fund prospectus to distill the key sentences from an already hard-to-read brochure.

By remember, fees are serious. While we may be talking about pennies and basis points, every penny in fund expenses cuts into your personal net return.

Also, watch this space about the looming battle about 12b-1 fees at the SEC. SEC Chairwoman Mary Schapiro said it should take place in the second half of 2009. This is a discussion which involves billions of dollars in money charged to shareholders. It will be a great example of the mutual fund industry versus shareholders.