Mutual Funds and other ways to go broke

Now that I have this blog started the big question is what to write about next. Since this is only the second day I have a few topics to choose from. Give it a week and I will be wondering what I was thinking.

Today's thoughts go out to Mutual Funds and other investment accounts. Investment Advisors, Retirement Planners and other folks doling out financial advice love to recommend Mutual Funds. A mutual fund is a wonderful concept, you put your money into a pool with lots of other folks and someone is hired to do nothing but make investment decisions on where to invest this money. Supposedly you win because the decisions are made by a professional and with all that money the risk is spread out allowing you to avoid a single disasterous investment.

My personal experiences indicate that investing in mutual funds are a disasterous investment. I have roughly estimated that I need to save $3 million by the time I retire in order to have $1 million left in my retirement account. My best investment in a mutual fund was a money market account paying 2% annually, at least I didn't lose what I put into it.

So what is going wrong with mutual funds besides my tendency to pick losers? Expenses! Investment Advisors who manage mutual funds charge outrageous fees to manage the money when compared to the fees charged large institutional investors like pension funds or really rich individuals. Now I am strictly talking about the Management Fee charges and not the other expenses such as accounting and custody fees. Differences in these fees between types of accounts is generally explainable.

It is not uncommon for an equity mutual fund to be charged in the neighborhood of 1% of assets annually in management fees. An institutional account on the other hand frequently pays the same investment manager .3% of assets. The only explanation for the difference is that the pension fund owners drive a harder bargain, after all, if GM pays a lower management fee on it's pension fund then it doesn't have to come up with as much cash to fund the pension obligations and the company earns more money.

The Board of a Mutual Fund has no such desire. The members are handpicked by the mutual fund sponsor (another name for sponsor is investment manager) so even if they are considered independent they have no loyalty to the mutual fund investor. They don't have any bottom line to look after.

What I am curious about and will look into if I have the time is whether any of these board members also have responsibility for pension funds and if they are getting the same rates in the pension funds as the mutual funds they work for. I doubt it. Given the voracious appetites of lawyers in the US I can't imagine why they haven't started delving into this topic. Conflicts of interest, favoritism, all concepts that make politicaly motivated AGs and class action lawyers salivate. Companies get blackmailed, sorry, I mean sued when the stock price drops and for no other reason, my idea seems to have a much better foundation, doesn't it?

I will have to pick up on this topic tomorrow as my real job requires my attention. Tomorrow I will also pick on UPromise and their 529 College Savings Account.