“Slap in the Face” Award: Stock Mutual Funds and the Advisors Who Love Them

Steve McDonald
by Steve McDonald, Bond Strategist, The Oxford Club

Editorial Note: As Steve mentions below, this week’s SITFA is going to irk a lot of people. Whether you’re an individual investor or money manager, we’d love to get your thoughts in the form of a comment.

The “Slap in the Face” Award this week goes to stock mutual funds. The actively managed funds, not the index funds. And I’m afraid this one will sting a lot of folks out there. Because most of the 401(k) money in the world is in this type of fund.

Here are just a few comments about these managed stock funds from none other than Jim Cramer.

First, quote “avoid them like the plague.” Now that’s some real fence-sitting for you.

Next, these funds aren’t there to make money for clients. Their only reason to exist is to increase client bases and thereby increase their manager’s fee income. Performance isn’t even in the equation.

Ouch! That’s really awful.

Here’s one that doesn’t mince words, either: “the biggest mistake you can make as an individual investor is to give [your money] to them...”

It also seems, since I left the brokerage business, financial advisors are now compensated by a particular fund family for recommending one fund over another. That’s in addition to the fee they are paid as a commission. And it’s legal.

This one is a real killer. You, the client, also pay a fee to help mutual funds market themselves. You pay for the research they buy, secretarial help, the electricity bill. All in all, you're likely paying something in the area of 2% of your assets every year, forever.

And, if you use a money manager who parks some of your assets in funds, you pay him a fee too - usually 1% or more. Three percent a year total to own mutual funds.

And 90% don’t beat the indexes! That’s highway robbery.

How could something as highly regarded as mutual funds - and believe me, 20, 30 years ago fund managers walked on water - how could they have come to the point that one of the most recognizable names in the money business has such a low opinion of them?

What happened to this industry?

I know back in the ’80s, when I owned funds, we weren’t paying anything even close to 2% or 3%. In fact the numbers 0.7% to 0.8% seems to stick in my head. And as a broker, I thought it was illegal to receive anything to recommend one fund over another.

How could an idea as great as mutual funds - and these were once a good deal for the small investor - a concept as pure as pooling your money and hiring a money manager to take care of it... how could it have gotten so bad in such a short amount of time?


Well, here’s a well-deserved smack for the stock mutual fund business.

Oh, and I know a lot of my viewers are money managers, analysts and, I’m sure, fund managers. So, I am expecting a lot of flak about this one. So, swing away.

Have a comment for Steve? Leave your thoughts below.

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