You may have heard mutual funds touted as one of the best ways to diversify a portfolio. They enjoy an air of investment acuity and financial maturity. But because of their complexities, investors can easily miss important information about fees in the prospectus — the document that explains how much the mutual fund will cost the investor. Dishonest brokers don’t always explain these fees adequately, in order to collect commissions for mutual funds that do not provide the best deal for the investor, which is a type of mutual fund fraud. Financial advisers are required by the SEC to find the least expensive mutual fund that best suits their clients’ needs. Unfortunately, financial advisers don’t always follow the rules.

For example, the Financial Industry Regulatory Authority (FINRA) suspended an investment adviser registered with NY Life Securities after finding that he had recommended an unsuitable mutual fund to his clients. FINRA alleges that he spent less than an hour reviewing the prospectus for a risky, non-diversified mutual fund. The adviser’s clients collectively purchased $4.5 million worth of shares in the fund, allowing him to earn $34,546 in commissions. As part of his Acceptance, Waiver & Consent agreement with FINRA, the adviser returned the commissions and agreed to an 18-month suspension.

How Mutual Funds Work

Portfolio managers administer funds according to one of the following strategies:

  • Actively managed fund: The portfolio manager buys and sells shares according to an investment strategy. Investors should make sure they’re working with a trusted investment adviser if they choose this route.
  • Passively managed fund: The portfolio manager simply follows an index, like the S&P 500. Their goal is to have the mutual fund produce the same returns as a particular index, instead of outperforming the market.

No matter what type of mutual fund an investor signs up for, it will come with fees and expenses. The SEC highlights the fact that funds with high costs have to perform exceptionally well in order to provide investors with higher returns than a low-cost fund.

Fees for Managing Funds

Mutual fund “loads” are fees charged when an investor executes a transaction in a fund.

  • Front-end loads are charged when investors initially purchase trades in a fund.
  • Investors pay back-end loads when the broker sells fund shares.

No-load funds: No-load funds charge a percentage based on the mutual fund’s assets instead of charging for sales of mutual fund shares. That said, no-load funds are not necessarily cheaper than loaded funds. They might have fees that make them more expensive than a fund with loads.

12b-1 Fees: Advertising, Administration, and Broker Profits

Many funds, whether they’re load or no-load mutual funds, charge 12b-1 fees. 12b-1 fees are part of the operational costs of a mutual fund. In theory, they’re supposed to cover the costs of marketing the fund, which could potentially lower the costs by spreading out the fees over more investors.

Critics of 12b-1 fees point out that there is no evidence that charging these fees results in lower costs for investors. In fact, one paper from the SEC showed that while funds with 12b-1 fees did grow more quickly than funds without, this growth did not provide financial benefits to investors. One survey from the Investment Company Institute highlighted the fact that most of the 12b-1 fees go toward the broker, while a very small percentage covers marketing expenses.

Investor Research into Mutual Funds

Loads and 12b-1 fees are just a few types of mutual fund expenses that investors might be expected to cover. Investors should be able to find all of the information about fees in the prospectus, under the “Shareholder Fees” section.

SEC Fines Financial Firms for Misleading Investors

Financial advisers have a fiduciary duty to find investors the best possible deal for a mutual fund. If individuals or firms are found to have broken this rule, regulators can impose a fine. The Wall Street Journal reported that the SEC’s recent crackdown on high-fee mutual funds drove “…[the SEC’s] annual fees to their highest total in more than 30 years.”

In 2019, the SEC created an amnesty program that allowed firms to self-report any unfair mutual fund fees charged to investors without receiving a fine, as long as they paid the money back to investors. 79 firms participated in the program and they collectively reimbursed investors approximately $125 million.

The four largest repayments came from well-known financial firms:

  • Wells Fargo – $17.36 million
  • RBC Capital Markets – 11.72 million
  • LPL Financial – $9.33 million
  • Raymond James Financial Services Advisors – $6.88 million

SEC enforcement attorney Gerald Hodgkins pointed out to The Wall Street Journal that focused enforcement on smaller firms and individual brokers doesn’t always result in quick reimbursement for fleeced investors, since these smaller entities are more likely to have spent the money they collected.

Ongoing Regulator Enforcement Actions

Regulators are still working to discourage violations related to mutual funds. Two recent reports indicate that the problem is still a major concern for investors.

  • The Wall Street Journal recently reported that Valic Financial Advisers agreed to pay approximately $20 million to investors who purchased higher-fee mutual funds. The SEC found that Valic advisers had failed to inform their customers of cheaper alternatives.
  • In 2020, FINRA announced that Merrill Lynch did not have adequate supervision in place to make sure customers received sales charge waivers and fee rebates for their mutual funds. FINRA ordered Merrill Lynch to return $7.2 million to investors.

Worried About Mutual Fund Fees?

If you’re concerned that you may have been charged too much in mutual fund fees, don’t hesitate to reach out to one of the experienced securities attorneys at Fitapelli Kurta. Call (877) 238–4175 or email

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