Why Mutual Fund Regulations Matter
A look at Morningstar’s white paper on conflicts of interest.
Yesterday, Morningstar's Policy Research Team published one of this company's knottiest papers. (There is no naughtiest paper.) By necessity, the three authors--Jasmin Sethi, Jake Spiegel, and Aron Szapiro--conducted some fancy econometrics. "Conflicts of Interest in Mutual Fund Sales" therefore is not an easy read. It does, however, tell an important lesson.
When an investor buys a fund from a broker, the sponsoring fund company reimburses that broker's employer. (Typically, the home office receives some of the proceeds, with the rest going to the broker.) These reimbursements are invisible to mutual fund investors, who see only a fund's unofficial sales charges, not its underlying business arrangements. As it turns out, those vary. Different funds have different payout amounts.