Mutual Funds: Conflicted Distribution and the New Total Expense Ratio Construct

Abstract:     
The updated New Total Expense Ratio is designed to categorize properly each type of mutual fund fee and expense. The purpose is to provide normative transparency of disclosure to serve the primary interests of fund shareholders. The current regulatory scheme of disclosure is short on transparency and long on opacity.

The Appendix includes the Ratio Construct and each category and component. The Ratio Construct is designed for mutual funds that distribute shares through brokers and other financial intermediaries, but it can be simplified for no-load funds. The Ratio provides normative transparency of disclosure to fund shareholders with the goal of its adoption by agreement or regulation.

The next major step is to cost each of the fees and expenses in the Ratio Construct. This article takes the first step by using research findings to estimate Direct Distribution Fees and Total Transaction Costs Net of Soft Dollar Trading Costs.

Discussion focuses on mutual fund distribution, including 12b-1 fees and share classes, distributor and types of distribution, revenue-sharing payments, soft dollar trades, directed brokerage, and distribution research and costs.

Number of Pages in PDF File: 9

Keywords: Total Expense Ratio, Normative Transparency of Disclosure, Ratio Construct, Mutual Fund Distribution, 12b-1 Fees, Revenue Sharing Payments, Soft-Dollar Trades, Directed Brokerage, Distribution Research and Costs

JEL Classification: G2, G28, G30

Accepted Paper Series