Archive for the ‘Ameriprise’ Tag

Why your mutual fund company thinks it can rip you off

For the first time ever, a federal court has sided with investors who accuse their mutual fund company of charging excessive fees. Shareholders of Ameriprise funds sued the company for charging higher fees to the fund investors than what they charge for similar institutional accounts. gavel-by-jason-morrison

This quote, from an e-mail between Ameriprise officials, is priceless:

Even before the Board’s request, there is some indication that Ameriprise knew that a fee discrepancy between institutional accounts and mutual funds might concern the Board. In response to a Wall Street Journal article that discussed the industry-wide disparity in fees, an internal email noted that “this could come up in a Board meeting” and suggested that “we should have a reply, though it may or may not be convincing.”

No kidding.

You can read the entire court opinion here.

Some of the more damning evidence is how Ameriprise apparently set its mutual fund fees. According to testimony from Ameriprise’s own board, they charged fees not based on what their actual costs were, but on what they could get away with.

Ameriprise entered the negotiation with a pricing philosophy wherein it attempted to establish fees that were “in the middle of the pack of funds with a similar size, objective and distribution model.”

Don’t you just love it when a fund company strives for mediocrity?

The funds in question are Ameriprise’s RiverSource funds. Just take a quick look at Morningstar’s fund family page, and you’ll see why investors should have known these were a bad deal going in.

78% of RiverSource’s funds charge a 3% to 6% upfront load for the privilege of investing with them. In other words, to even get into an Ameriprise fund, someone who invested $500,000 over a number of years would have paid an initiation fee of $15,000 to $30,000. Even after that sacrifice, RiverSource funds still charge annual expense ratios of between 1% and 2%. In other words, after paying $30,000 up front, that investor then paid RiverSource about $5,000 a year to keep managing his money.

And, as mentioned in a previous post, that doesn’t even include the mutual fund’s brokerage fees.

But lets take one fund as an example and see just how much Ameriprise was potentially overcharging the little guys in comparison to its top customers. According to recent returns on the RiverSource Disciplined Value fund, institutional clients were charged somewhere between 0.38% and 0.74% in expenses per year. That’s very low.

The equivalent mutual fund? 1.28%, or more than four times as much, depending on the year.

Loyola University professor Charles Murdock testified on behalf of the investors that “the advisory service provided to the mutual funds was similar, if not identical, to the service Ameriprise provided to its institutional clients.”

So riddle me this: Why does a mutual fund company charge small investors twice as much as big investors for the same service?

I have a sinking suspicion that it’s because they thought they could get away with it.

Let’s hope this changes.

– Joe Light

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