Thanking The Mutual Fund Industry

I’m a bit rough on the mutual fund industry, but this week, it seems appropriate to acknowledge one positive.

Mutual funds have democratized investments. Thank you.

Before the rise of mutual funds, if you wanted to invest in the stock market, you had to either be a big player or be prepared to get fleeced. When the market crashed in 1929 less than 1% of the public owned a share of stock. The first mutual fund began operations in 1928. It took a while for these funds to catch on, but now just about anyone with a 401(k), an IRA, or a 529 plan owns stocks indirectly through mutual funds.

Mutual funds brought investing to the people. That’s a good thing. They’ve allowed families to build wealth, educate their children, and retire securely, all without having to pay a personal money manager.

That said, the democratization of investing has at least one of the same issues as democratization of government. It’s summed up in a word that’s being used in Washington and on Wall Street a lot these days – transparency.

Just like in government, I think it’s only fair to know who is being given favors, and why. Why don’t mutual funds clearly identify their true costs to investors? Why do funds play favorites – putting big investors ahead of smaller ones? Why aren’t funds more forthcoming about how much of their managers’ money is invested in the fund? Why do investors have to pay big fees for closet indexers? And why are share classes so confusing?

Again, my hat is off to the mutual fund industry for popularizing stock ownership, but it has a long way to go. A lack of transparency is at least in part starting to cause investors to turn away. Is it really too much to let investors know at any time where exactly their money is invested, and why? And if not, what does that say about that industry’s attitude towards their customers?

I don’t believe Spoke Fund® firms have solved every ill of the mutual fund industry. But I do think there is a lot to be said for a transparent firm where investors know what the portfolio manager holds, why he holds it, how much it will cost for them to invest exactly the same way – and to have the assurance that each and every investor will be treated fairly, too.

I think that’s the least that investors should expect. Don’t you?

Happy Thanksgiving.

Cale Smith

About Cale Smith

Portfolio Manager at Islamorada Investment Management.
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6 Responses to Thanking The Mutual Fund Industry

  1. Kirk Kinder says:

    This is true, and we should thank mutual funds for this. However, the Model T liberated the average American and fostered surburia, but you shouldn’t be driving around anymore in a Model T. Mutual funds are antiquated vehicles that are past their usefulness.

  2. JayTrader says:

    I don’t know the point of this post. rnThanks for your existance, please continue to loot us? rnrn

    • Cale Smith says:

      Ah, well said. I suppose the point I was trying to make was:nn”Thanks, Mutual Funds, but now it’s our turn. Meet Spoke Funds.”nnSo, yeah, maybe the Thanksgiving tie-in was a stretch. I’m a sap.nn”Thank You. Please Continue to Loot Us.” would have been such a better headline…

      • Jay H. Mani says:

        Cale-nThanks for the reply. I am sorry for sounding flippant or dismissive. I didn’t mean it that way. You make a good honest point when stating that the MF industry should be more open and clear in their marketing and dealings, but this will never happen. Never happen as long as lobbyists exist. It will never happen as long as we have TBTF institutions doing business as usual. The only reason MF’s exist? The common person is a lazy idiot and is not capable of handling his/her finances. So they hand it over to a PIMCO or a Fidelity who promptly know that the average person is a lazy idiot. Ignorance is always bliss but is sacrosanct when dealing with the financial services industry. The entire MF industry has the public convinced of this fact, yet the public still invests in them. Itu2019s no different than voting against your best interests on election day. Why do we do it? Why do we allow looting and pillaging? We have no choice. Itu2019s the cost of doing business in America. Wall Street, the banking sector, and the MF complex know this and have the legal frameworks on their side. Unfortunetely, there is no alternative and the industry knows that.

        • Cale Smith says:

          Good points, Jay, and certainly no reason to apologize. No offense taken. And have you checked out Think it’s at least one alternative to the Mutual Fund Industrial Complex. nnYes, the switching costs are huge…even despite all the evidence and serious knocks against mutual funds, most investors are just reluctant to pull assets away from them. I think part of that is because of the perceived lack of alternatives, and part is due to not knowing how mutual funds really work.nnBut, here’s to hoping we can coach ’em up, eh? nnHappy Thanksgiving.nn- Cale