The Invisible Hand
Ask somebody which is better: open fees where the buyer readily understands all costs, or hidden fees that can’t be seen (and often aren’t known)? You know what the response will be. That answer, however, is incomplete. We may fervently believe that transparency is best, but that doesn’t mean that we invest that way. We sin, again and again.
For starters, the mutual fund was founded on opacity. The first mutual fund could have charged for its services in various ways. It could have charged a fixed fee for its services, as a barber does. Pay the fund $50, and in return it will manage your assets for the next 12 months. (Fifty bucks was real money in 1924.) Or, it could have charged a floating fee, adjusted for the size of the customer’s account, to be collected in arrears. The fund took neither approach. It spared the buyer from making any explicit payment, and instead extracted its fee from the portfolio.