Are Mutual Fund Expenses Too High? A Commentary

Abstract

The mutual funds industry does not compete on price. Mutual fund managers are the primary beneficiaries of fund economies of scale. Mutual fund managers charge too much for management fees. Multiple share class funds have higher management fees and total expenses than single class funds. "Mutual" mutual funds management at cost is much more cost efficient than the industry's external governance structure. Distribution from mutual fund supermarkets is not "free," but is paid from fund assets. Fund managers differ significantly in the amount of expenses they charge to fund assets. Mutual funds with different major characteristics, such as investment style, differ in their expenses. Regardless of trend, mutual fund expenses are too high. And, finally, 12b-1 fees, soft dollar arrangements, and directed brokerage and revenue sharing agreements are improperly costly to fund shareholders and should be prohibited.

Keywords: mutual fund expeneses, non-price competition, economies of scale, multiple share classes, management fees, mutual mutual funds, distribution, supermarkets, investment style

JEL Classification: G2, G23, G28