You're a mutual fund. You have all kinds of expenses beneath that 1% Assets Under Management fee you charge. You have to pay a dozen analysts. You have two portfolio managers who call the shots. You have a trader. You have lawyers, accountants, and auditors. You have all kinds of computer hardware and software licenses and security experts who come in and snoop around all the time. You have rent, insurance, and secretaries. And then marketing. You buy ads.
It all adds up to a number. It's your annual nut. Many funds actually disclose this number and "market" that they're a "cost plus" business (i.e. high value to the customer). But, in reality, investors care about one thing: the shininess of the white shoes of the people doing the investing. (Ok, ok, snark alert. No, they care about investment results. That's it. "Show me the money.")
Related or Semi-related Video
Finance: What is a 12b1 fee?91 Views
Finance a la shmoop.. what is a 12b1 fee what a clever name like why don't they give
normal names to these things like fund admin expense fee or just name it Bob [Document with Bob written at the top]
but they don't so you just have to memorize what they mean anyway
mutual funds had to bear enormous communications related expenses in the
pre computer-internet everyone has an email address era delivering gobs of [Mail man arrives at house]
paperwork snail mail to its customers it was enough expense to them that well
they frankly just hated doing it and did more or less anything they could to [Man licking envelopes]
avoid having to deliver you know dead trees so along came the investment
advisors act of 1940 which basically recognized that mutual funds did in fact
have expenses that were more than bonuses to the senior partners the 12b1
fee system allowed a fairly set and standard amount of fees to be charged to
customers so that a given mutual fund could recoup the money it had to spend [Fund statement document appears]
mailing annual reports and performance data and tax information and all kinds
of other things to its customers the 12b1 system was basically a
pass through set of charges such that the customer paid for her own paperwork
incentivizing mutual funds to actually do a good job communicating with their [Woman receiving a trophy on stage]
constituency and it let the little guy mutual funds compete against the big guy
mutual funds who already had all that infrastructure of course the biggest
winner out of this entire deal yeah it was the trees especially the ones who [Tree given a first prize award]
got in early on Google
Up Next
What is the difference between mutual funds and index funds? Mutual funds are professionally managed. Those investors trade shares and realize taxa...
What are Assets Under Management? The assets under management figure is the market value of all of the investment assets that a financial instituti...