I despise the mutual fund industry but before I tell you why I’d like for you to think about Bill Gates.  Mr. Gates is one of the wealthiest people in the world.  A great deal of his wealth, however, is tied up in Microsoft stock.  Keep Bill (and his wealth) in mind while I tell you why I dislike the mutual fund industry.

First, the mutual fund industry feeds off of YOUR money.  The industry uses YOUR money to advertise on TV, radio, the web, and print media to tell you how great they are at investing YOUR money.

But if you ever sit down to ask yourself a couple of fundamental questions, such as:
“If mutual funds are so awesome, why do they spend so much money, hundreds of millions of dollars, in advertising?  Why don’t they simply invest the $100 million from their ad campaign into their funds?”

Then you might come up with some dirty little answers:  The fund companies make their money from fees they charge YOU for supposedly investing YOUR money and NOT from their wonderful investment strategies.
Ironic isn’t it?

So I can imagine the mutual fund companies have a dynamic like this:

Accountant says, “We can take $100 million ad money and invest it in our mutual funds and earn 9% return.  Over 5 years that’ll give us $56.5 million in profit.”

Marketing guy proclaims, “We can take $100 million and spend it in advertising.  We think we can get 1 million suckers err….I mean investors to fork over $10,000 each; we’ll get an inflow of $10,000,000,000 (10 billion) and we can charge them 2% fee.  We’ll make $200 million every year!”

CEO cheers, “That’s great news!  Marketing guy you get a big bonus.  I’ve got to go to the board to tell them the good news so I can get my $30 million bonus.”

Board says, “Wow, we’re managing 10 billion, that’s great publicity for our stock and its up.  Good work CEO, here’s your 30 million dollar bonus… and by the way we have plenty of cash to lend you for unsecured loans for as much as you want.  Help yourself.”
In reality, I’m sure the conversations are much more sinister and disgusting but you get the point.

Secondly, The mutual fund industry creates a great deal of FUD (Fear, Uncertainty, & Doubt) surrounding your retirement and financial well-being. Too often, the industry thinks that you are either too stupid or too lazy to be able to invest your own money.   They promise “sophisticated tools” to grow your money, throw in a few buzzwords like “optimize” your growth, “risk managed” portfolios, and “wealth” management and presto you get average returns like everyone else in their funds sans a hefty fee they deduct from your portfolio.

Remember Bill Gates?  Have you ever considered what would happen if Bill decided to sell all of his stock tomorrow?    If Mr. Gates decided to sell 40 billion of his stock the immediate result would be a significant drop in the value of Microsoft shares.

There is a saying that a rising tide raises all boats.  While true, a waning tide drags everything down with it as well and this perhaps captures what I think mutual funds do for investors.  As long as people are pumping money into the funds, the tide rises.  As soon as the pump changes direction, the tide falls and brings everything down.   We’ve seen it during the dot com bubble.  Every wonder where those brilliant fund managers were during the bust?   I urge you to consider the implications of what will happen to mutual funds when the tide goes out permanently.

From a personal perspective, I’ve interviewed a few “financial advisors” over the years and I always ask some basic questions like, “What do you think about investing in ETFs?” or “What do you consider to be diversfication?”

To my astonishment, these “advisors” often don’t know what ETFs are and they consider diversification to be invested in a few different kinds of mutual funds: bond funds, sector funds, international funds, and various stock funds.

No mention of real estate holdings, cash holdings, bullion/precious metals holdings, real bonds (not bond funds), US Treasuries, currency diversification, offshore holdings and a bunch of other things I won’t get into here.
You don’t have to think too long why they don’t mention any of these things – THEY CANT COLLECT FEES FROM YOU FOR OWNING GOLD OR REAL ESTATE!

And yet another reason why I don’t like the industry is because of the “herd” mentality it creates with the general populace.  How exactly do you expect to create wealth doing exactly what everyone else is doing?  If everyone is doing the same thing then doesn’t that mean you’re doing the average?

As much as I despise mutual funds, they do have their place in our current economic system.  Often, when employed, your tax-deferred investments are tied to a 401k or 403b plan which is usually linked to a small selection of mutual funds.  Essentially, you are held captive to the mutual fund industry by your employer.  On occasion, there is an option for holding your tax deferred funds in cash but this usually pays a paltry 3% return or worse.  Given this scenario, you have little choice but to invest in mutual funds and I can only advise to choose the lesser of two evils:  paltry returns or ridiculous fees.