Rethinking Mutual Fund Pricetags
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Friday, November 28, 2014

Rethinking Mutual Fund Pricetags

John Rekenthaler wants you to rethink how you explain fees to mutual fund investors.

In his latest "Rekenthaler Report" column on Morningstar, Rekenthaler lays out three elements for improving mutual fund fee disclosures to investors. Rekenthaler draws on proposals suggested by his colleague Paul Ellenbogen.

Rekenthaler argues that a better way to talk about fees involves: 1) "grouping fund costs into relevant elements" (he suggests five categories), 2) "providing context", and 3) "providing individualization on financial statements."

For 1), currently funds tend to divide expenses into "management fees", "12b-1 fees", and "other expenses". Rekenthaler would do away with those categories and replace them with: a) "portfolio management fees", b) "administrative fees", c) "operational fees" (custody, transfer agency, customer service, statements and reports, fund boards, etc.), d) distribution fees" (including costs for the company's own sales and marketing efforts, as well as outside platform costs), and e) "advisory fees" (i.e. fees paid to advisors selling the fund's shares).

For 2), Rekenthaler would add an "industry average" column next to the numbers in 1), so that mutual fund investors could see how a fund's costs stack up against, say, "an equal-weighted mean of funds sharing the same broad asset class." And for 3) he would add an appendix translating the costs in 1) into the specific dollar amounts the investor paid in each category.

"Make expense components meaningful, provide context, and translate actual investor costs into dollars," Rekenthaler concludes. "That fruit should be easy enough to pluck."

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