Mutual Fund "Supermarkets"

A Mixed Blessing

One important reason that mutual fund assets are soaring is because the hassles of investing via funds have been reduced substantially in recent years. And the biggest reason by far that such hassles have been reduced is the introduction of so-called mutual fund "supermarkets" - services that permit individuals to move money into or out of funds with a simple phone call, and (with respect to "no load" funds) at no apparent cost. Of course, there is no free lunch in financial markets, and the "supermarkets" in question are actually quite costly, in two senses. First, mutual funds sold via such "supermarkets" typically pay for their "shelf space" at rates that range between 0.15% and 0.35% of capital gathered via such channels. Needless to say, such "shelf" fees ultimately come out of investors' pockets. Second, the ease and apparent low-cost with which individual investors can "trade" funds encourages two related and disturbing phenomena: excessive switching (especially in tax-sheltered retirement accounts) and the chasing of "hot" funds. Unfortunately, the costs associated with such switching are not immediately obvious: trading costs are excluded from mutual funds' reported expense ratios (albeit not from their reported time-weighted returns), and the perverse impact of ill-timed switches in pursuit of recent success is manifest only in dollar-weighted returns, which mutual fund families do not disseminate.