Mutual Funds Are Not Your Friends

There’s a huge conflict of interest in the mutual fund industry. If you don’t understand what it is, you are likely to get badly hurt. If you own a mutual fund, then keep reading.
We’re going to review the conflict of interest that exists in the world of mutual funds and Wall Street financial planners. I call the whole scheme, the fund managers, financial advisors, regulators and legislators, the investment-industrial complex.  The problem is, their earnings and your earnings run in different directions.
Their combined job is to make sure your Finance For Beginners Books earnings keep flowing to them.
Let’s start with mutual fund families, or mutual fund companies. These companies are paid from assets under management, and fees are charged based on assets under management. “Assets under management” is your money, your future, your retirement, and your kids’ future. The funds are not paid on performance. They’re paid on how many dollars they can manage. This means the attention of the managers of fund families, their focus, is going to be on getting more assets under management and more fees to charge and not on investment performance. 
This is a huge conflict of interest with the investor, you and me. This means that because most of the companies that Kotak Mahindra Bank Business Model manage money are publicly traded, they’re going focus on how to increase fees and how to get more assets under management.
The first duty of the board of directors of a fund family or a fund company is to its shareholders and not to the people investing in the fund, not to the investors. This is also true with banks. The only job of the board of directors of every publicly traded bank and money center (which are essentially large banks) is to focus on the needs of the shareholders. So they do what’s best for the shareholder and not for the investor. 
Here’s an example: T. Rowe Price is a publicly traded mutual fund company. They’re a fund family. From 2001 to 2005, their assets under management grew 70%. Now, during the same time period, their stock price grew 250%. During this time, the stock market itself grew minus 6%, and TRP pretty well matched that. So you lose six percent of your wealth, and the mutual fund company grows their stock price 250%. I would call that a disconnect. This means that for these companies’ managers, their job is to do what’s best for the shareholder and not for the investor. That’s a huge systemic disconnect. 
Here’s another example: The chief investment officer (the CIO) of this same investment fund company had $100 million in company stock, but only $1 million invested in the mutual fund that this company managed. This was back in 2005. He was really not investing in the same investment that you and I were invested in. 
Now, I’m not just picking on T. Rowe Price. They’re very large, and most people know them. Most fund families have the exact same thing going on. Another officer in this company, Edward Bernard, sat on 80-plus mutual fund boards in 2006. In that year, the most he had in any one of those mutual funds was about $100,000, but he had over $20 million in the stock of the parent company, with another $40 million in stock options. Which investment does it appear he personally believed in? Where was his allegiance during 2006; was it to the investors who put their retirement money and their savings money and their college money into the mutual fund, or was it to the company’s performance and its shareholders? 
This problem is systemic, a problem that is not going to go away or change. Take any publicly traded mutual fund company or financial advisor company. These companies all have the same underlying motivation. Of the 50 largest mutual fund companies, more than 40 are either publicly traded or owned by large conglomerates that are publicly traded. It means their allegiance is to the shareholders – and their personal wealth – and not to you and me.  That’s why they always focus on increasing assets under management and increasing fees, because that makes for a higher share price.
In the examples I used before, where these officers had $50 million and $100 million in stock, their allegiance is to the profit of the company and not the investor. It’s simply their only job. So if you think someone in the mutual fund industry is watching out for you, think again. They watch your money, all right, because your money makes them rich, not you.

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