I dislike ETFs. I've used them occasionally. Count me personally in the mutual fund camp. However, I don't think any
of schooner's remarks constitute a compelling "case against ETFs," certainly not a case strong enough to justify telling other people to avoid all ETFs.
But testy exchange in another thread did
get me thinking of a potential "case" against mutual funds
. The "case" involves the complex and secretive business arrangements that govern mutual funds when bought through brokerages and advisors
. If we are even aware that you couldn't always buy mutual funds at brokerages, we usually think that the ability to buy them at brokerages ("invented" by Schwab in the mid-1980s) is a good
thing. It certainly led to a rise in the use of no-load funds.
However, there has always been something murky and mysterious about the business arrangements surrounding mutual fund sales through advisors and brokerages. It's not quite clear what "no-transaction-fee" funds are doing in order for the brokerage to offer them with no transaction fee. When transaction fees do exist--and they usually do exist for e.g. Vanguard index funds--they are very high by 2019 standards.
Obviously there is money changing hands behind the scenes. I am not clear who is paying whom how much, and what they get for it in return. Nor is it clear to me whether people who buy the mutual fund directly (not that people do that much any more) are affected by this.
I was intrigued when Taylor Larimore linked to this Morgan Stanley document: Revenue Sharing Fund Families.
It contains an interesting statement, and a not totally convincing disclaimer. The boldfacing is mine:
Although we seek to charge all fund families the same revenue sharing fee rate, in aggregate Morgan Stanley receives significantly more revenue sharing from the families with the largest client fund share holdings at our firm. This fact presents a conflict of interest for Morgan Stanley to promote and recommend funds from those fund families rather than funds from families that in aggregate pay us less revenue sharing. In order to mitigate this conflict, Financial Advisors and their Branch Office Managers do not receive additional compensation as a result of these revenue sharing payments received by Morgan Stanley.
Before I get to this list, let me emphasize. To me, ETFs seem to be designed to seduce, but not compel, investors into acting against their own best interests.
Very well. Mutual funds, particularly when offered through third parties, seem to have designed-in conflicts of interest that seduce, but do not compel, those third parties to steer clients and investors toward icky funds.
In the Morgan Stanley document, the list of so-called "revenue sharing" fund families is not alphabetized, which is... strange, isn't it? Allow me to alphabetize it. What sticks out in my mind is that it is oddly familiar list in terms of having names that seem to come up when people post long lists of two dozen funds that their advisors recommended, that are otherwise rarely mentioned in the forum. When's the last time you've seen a posting about a Lord Abbett fund, except in a request for portfolio advice?
It's worth noting that Vanguard, Fidelity, and Dimensional Fund Advisors are conspicuously absent.
Here are the funds that Morgan Stanley says "present a conflict of interest" (but not to worry because they "mitigate" it).
1919 Investment Counsel, LLC
Abbey Capital Limited Innealta
Aberdeen Asset Management Inc.
Advisors Asset Management**
Alliance Bernstein Funds*
Alpine Funds ALPS
Altegris Funds American Beacon Angel Oak Arbitrage
Aquila Group of Funds
Astor Asset Management
Babson Capital Management
Cohen & Steers
Davis Advisors Transamerica IDEX Allianz*
Dreyfus Premier Funds**
DWS (Deutsche) Funds**
Eagle Fund Distributors, Inc.
Eaton Vance Group *
Fidelity Advisors* Ivy Funds* Putnam Funds* PIMCO*
Fidelity Offshore BNY Mellon Offshore Janus Offshore
First Eagle Funds*
Fred Alger & Company
Good Harbor Financial, LLC
Guardian Investor Services LLC
Hancock Horizon Investments
Hartford Funds** Mainstay (NY Life)* Federated Securities* Goldman Sachs* Virtus*
Hatteras Capital Distributors, LLC
Henderson Global Investments**
Highland Capital Management American Century Investments**
Janus Capital Group** Gabelli Funds
John Hancock Funds* Franklin
JP Morgan Offshore
Keeley Investment Corp.
Kinetics Asset Management, Inc.
Legg Mason Offshore
Lord Abbett Funds*
Mirae Asset Nationwide Olstein Financial Ramius RidgeWorth Funds Salient Partners Tortoise
Morgan Stanley Funds*
Neuberger Berman Management Inc.**
Pacific Select Distributors, Inc.
Pictet Funds (Europe) S.A.
PIMCO Europe LTD Lateef Fund
Selector Advisors LTD
SunAmerica Funds Guggenheim*
Third Avenue Offshore
Touchstone Family of Funds**
UBS Global Asset Management
Van Eck Management
VOYA Investments, LLC**
*Denotes global Partner Fund Family
**Denotes emerging Partner Fund Family
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.