Book by Louis Lowenstein Exposes Mutual Fund Industry

Think the mutual fund you own is a special investment. Think again. Most financial companies package and sell mutual funds like a supermarket sells soap. Bulk it up and ship it out.

Louis Lowenstein is is a lawyer, a former business executive and a professor emeritus of finance and law at Columbia Law School.  He has just written a book entitled The Investor’s Dilemma: How Mutual Funds Are Betraying Your Trust and What to Do About It.  The central thesis of his book is that the mutual fund industry is incented on getting your money, not on making it grow.

What makes him say that?  Almost all mutual fund companies are paid based on the assets under managements, not on the return they generate for their investors.  That means they get paid year-in and year-out whether you, the investor make money. 

The mutual fund industry has grown into a 10 trillion behemoth.  Most funds simply track the major indexes and often don't even perform as well.  Yet, you are paying for their "expert analysis."

As an investor, be wary and understand that these companies don't care if you make money with them, they just want your money to stay with them.  Check your funds performance and if it isn't up to par, look for one that is generating solid, above market returns. 

Here's the book review in the NY Times.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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  • ktexas

    April 21, 2008

    I would like to see a mutual fund manager agree not to be paid if his fund can't at least exceed the returns of the comparable index.

  • Sam Cass

    April 22, 2008

    I think that's a fair compromise. If an actively managed mutual fund can't beat its closest index, or even be in the top 10 for a particular segment, I don't think management should be compensated. Of course, investors should really vote with their feet and leave, but they don't.

  • a midwest investor

    May 19, 2008

    I think Professor Lowenstein raises very disturbing points in his book. The biggest problem I have, now that I have a significant amount of money invested is--where do I move it? Where do I invest it?

    I have a personal financial advisor who is just like the mutual fund managers--gives me very high fee, poorly performing funds, does not go to or recommend no-load funds or indexes, and gives poor advice. But how is he different from others? I have taken a lot more funds and invested it privately infidelity and vanguard funds, done better than his rate, but now have no confidence in them upon reading Lowenstein's book. Where do I take it? A Mattress?

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