The <i>Total</i> Expense Ratio: The Reality of Distribution Fees 'Behind the Mutual Fund Curtain'

Abstract

This study uses the portion of a new Total Expense Ratio construct that discloses the reality of adviser/distributor payments of distribution fees (hidden) to sales brokers behind the mutual fund curtain. Distribution fees consist of dealer (broker) concessions, account servicing (12b-1) fees), types of revenue sharing payments, and soft-dollar trades. Distribution fees are one of four categories in the Total Expense Ratio, the others being (1) management fees, (2) other expenses, and (3) transaction costs.Distribution fees and their sub-categories are the scope of this study, but adoption of the complete Total Expense Ratio would provide mutual fund investors with normative transparency of disclosure of its four categories and their sub-categories. Such transparent disclosure would provide necessary, but not sufficient, conditions for complete adoption of transparent disclosure to the full scope of fund adviser managerial and regulatory practices and decisions.Adoption of the complete Total Expense Ratio with normative transparency of disclosure followed by prohibition of 12b-1 fees, revenue sharing payments, and soft-dollar trading requires strong action by fund independent directors, the fund industry, and, most importantly, by Congress and the SEC. Only a few fund advisers are likely to join in this effort to change their very profitable status quo. But, fund shareholders deserve to receive their fiduciary protections under law.