Why do investors buy shares of actively traded mutual funds? Most of those funds charge a hefty sales commission (front-end load), charge an annual management fee and force customers to share advertising expenses. And to make matters worse, they cannot out-perform their benchmark indexes before those fees are extracted from the investor's account. Why are customers willing pay all these fees and accept less than average returns? They just don't know any better.
Things are even worse in Canada. The Canadian Capitalist comments on the same topic. As does Preet who discusses advisors recommending actively managed funds.
No-load funds exist, and some are quite successful in nabbing investor dollars. Index funds are available and not only are they free of sales commissions, but they charge much lower annual fees and never under-perform the benchmark index – because they are the benchmark index.
So why do investors make poor choices and choose to pay high fees and accept lousy results? The only reason I can find is that there exists a sales team that earns juicy commissions for convincing clients to make these money-losing investments. Stockbrokers earn good commissions when selling mutual fund shares. Many brokerage houses run their own funds, collecting both management fees and sales commissions. Insurance companies sell mutual funds. In short, there's no shortage of salespersons to market these below average products.
Why can't these brokers tell the truth to customers? Why don't they tell customers that no-load index funds are more likely to provide better performance in the years ahead, as they have in the past? The answer is lack of integrity. Greed, and the need to earn commissions, regardless of how it affects their clients – that's Wall Street's way. The good advice slogan 'pay yourself first' certainly applies to salespeople on Wall Street.
It's not so different (it's just less harmful) than the sales pressure exerted by mortgage brokers who encouraged people to lie on their applications and refinance mortgages – knowing that the client would be unable to make payments when rates readjusted in two years. All in the name of earning a fat commission for themselves.
This is nothing new. It's been going on forever. One person takes money from another any way he/she can. I'd go so far as to call it a scam to sell mutual funds.
Look at Bernie Madoff for example. He does not cooperate with authorities. He tells no one where the money is hidden and spends the rest of his life in prison. But his family gets to keep that money. There's no effort to return it to those from whom it was stolen. There's no integrity; no interest in trying to do the right thing.
For my part, I'm trying to help investors learn to protect their assets with option strategies. But, there's no sales team. There are no commissions to be earned. So I, and other bloggers, who do the individual investor a good service, accept the good feeling that comes with providing that good education – with little financial reward in return. Too bad my message cannot find wider acceptance, but with no commissions to be earned, few are willing to take the time and effort to spread the word. Integrity – a job well done. That's my pay.