In 2000, mutual fund investors overpaid Wall Street $36 billion to manage stocks, bonds, and real estate totaling $3.7 trillion. Nearly 1% per year of assets were wasted in unnecessary fees, according to IndexFunds' comprehensive new survey of mutual fund fees.

[MORE BAD NEWS FOR ACTIVE INVESTORS (comments added by Mark Hebner):

In 2003, we are about in the same situation, but you can now add in scandals of late trading and market timing to the concerns of actively managed funds.

In addition, expanded to a global basis, the problem is possibly 3 times that or $108 billion. In international markets we estimate that expense ratios and loads are about double the US and the total assets outside the US are about equal to US equity market. This obviously varies from year to year. When you throw in the 2003 Dalbar study that indicated the average equity fund investor only obtained about 20% of the broad market return over the last 19 years, due to their active management, the waste grows by about 8% of the total market value of global equities per year! The S&P 500 index has a 77 year history of earning about 10%/year, so investors leave about 8%/year of the market return on the table. By the way, inflation has been about 3%/year for 77 years and taxes on actively managed portfolios have been estimated by John Bogle to be about 2.7% of the value of the portfolio, in taxable accounts. Do the math.

The 12-Step Program to Index Funds elaborates on the global scandal of active management. There is hope, however, because a risk-appropriate globally diversified portfolio of index funds, tilted towards small and value risk factors, allows investors to capture the risk adjusted returns of the market. That portfolio must be held and rebalanced. When done properly, this investment strategy is the solution to the investment puzzle and the prudent alternative to the failed strategy of active management.]

# of funds considered	8,545
Total invested	$3,738,342,970,000
Fees actually paid	$46,967,540,861
Ave. actual annual expense ratio	1.26%
Ave. benchmark fund expense ratio	0.29%
Projected unnecessary expense	0.97%
Total $ wasted	$36,188,973,586

In every category of mutual fund, well-established and broadly-diversified alternative benchmark funds offer significantly lower fees than the average fees investors actually pay for actively managed funds. If investors switched to such alternative funds, they would significantly lower their cost of investing.

Numerous studies have shown that, on average, fund returns before fees in an investment category will tend to follow the average performance of of that category unless greater risk is taken on. Low fees are therefore the best way for the average investor to maximize their returns. In addition, there are i index funds that are designed to capture risk factors that correlate to higher returns over 70 year periods. These indexes have higher expected returns and lower fees.

Overview

This study sought to examine whether individual U.S. mutual fund investors are paying competitive fees for money management services. It concluded that they are not, due to high management fees.

First, actual fees expected to be paid in 2000 were estimated for 8,545 mutual funds available to individual investors in the U.S. This was calculated by multiplying assets of the fund by annual fees as reported by management.

Second, fees investors would have paid had they invested in a broadly-diversified, low-cost benchmark or fund in the same fund category were computed.

The difference is the amount of unnecessary management expense.

To ensure fair comparisons between the entire universe of mutual funds and low-cost benchmark funds, benchmark funds in each of 41 investment categories were carefully selected.

Active mutual fund investors pay 0.97% of their investment above and beyond the basic cost of investing in their asset class for the privilege of trying to beat the market, a decidedly low probability. This is over three times the cost of basic investing (0.29% on average) in the relative safety of a low-cost benchmark fund, which are broadly diversified within an index or asset class.

List of Benchmark Funds for 41 Investment Categories

Fund Name	Symbol	Investment Category	No. in Category	Rank in Assets	Benchmark Fees	Excess Fees %	Excess Fees (Category)
Vanguard Aggressive Growth	VHAGX	Aggressive Growth	152	31	0.46%	1.25%	1,305,133,872
Vanguard Life Strategy-Mod Gr	VSMGX	Asset Allocation - Domestic	234	4	0.29%	0.90%	730,921,418
First American-Strategy Income	FSFIX	Asset Allocation - Global	52	23	0.30%	1.57%	205,890,368
Vanguard Index-Balanced Ptfl	VBINX	Balanced - Domestic	313	7	0.20%	0.81%	872,453,199
Scudder Pathway Balanced Port	SPBAX	Balanced - Global	18	3	1.14%	0.83%	14,312,833
Vanguard Convertible Fund	VCVSX	Convertible	43	7	0.55%	1.13%	89,636,373
Vanguard Fixed-High Yield	VWEHX	Corporate - High Yield	265	1	0.28%	1.31%	1,064,958,267
Dreyfus Bond Market Index Basic	DBIRX	Corporate - Investment Grade	125	2	0.15%	0.56%	122,404,875
Vanguard Emerging Mkts Stock Idx	VEIEX	Emerging Market Equity	76	1	0.58%	1.49%	157,214,987
Fidelity New Markets Income	FNMIX	Emerging Market Income	18	1	1.09%	0.60%	5,613,054
Vanguard Equity Income	VEIPX	Equity Income	198	8	0.41%	0.54%	728,473,221
State Farm Interim Fund	SFITX	General Bd - Investment Grade	324	82	0.19%	0.78%	441,574,894
Vanguard Bond Index-Long Term Bd	VBLTX	General Bd - Long	10	3	0.20%	0.25%	9,098,667
Vanguard Bond Index-Total Bd Mkt	VBMFX	General Bd - Short & Interm	102	1	0.20%	0.30%	75,781,838
Trust for Credit Uns-Mortgage	TCUMX	General Mortgage	65	6	0.29%	0.85%	75,163,678
Vanguard Global Equity Fund	VHGEX	Global Equity	320	95	0.71%	0.76%	1,561,987,840
Payden & Rygel Global Fixed Inc R	PYGFX	Global Income	196	11	0.49%	0.89%	563,757,133
Vanguard Growth Index Fund	VIGRX	Growth - Domestic	1200	12	0.12%	1.22%	13,119,974,377
Vanguard Tax Managed-Gr & Inc	VTGIX	Growth & Income	592	48	0.19%	0.98%	4,804,795,544
Van Kampen Pr Rate Inc	VKPRX	Loan Participation	13	1	1.36%	0.14%	32,953,526
Dreyfus MidCap Index Fund	PESPX	Mid Cap	233	34	0.50%	0.98%	1,122,007,719
Northeast Investors Trust	NTHEX	Multi-Sector Bond	110	6	0.61%	0.94%	315,100,646
Vanguard Muni-High Yield	VWAHX	Municipal - High Yield	68	4	0.18%	0.74%	221,100,105
Vanguard CA Tax Free Insd-IT	VCAIX	Municipal - Insured	120	6	0.17%	0.48%	121,358,112
Vanguard Muni-Intermediate	VWITX	Municipal - National	374	1	0.18%	0.62%	532,277,696
Evergreen NC Muni Bond Y	ENCYX	Municipal - Single State	1072	90	0.23%	0.80%	804,492,039
Vanguard Europe Stock Index Fund	VEURX	Non-US Equity	720	7	0.29%	1.17%	2,658,834,250
Vanguard 500 Index Fund	VFINX	S&P 500 Index	68	1	0.18%	0.15%	236,286,476
Vanguard Specialized-Energy	VGENX	Sector - Energy/ Natural Res	56	1	0.48%	0.77%	41,204,876
Century Shares Trust	CENSX	Sector - Financial Services	47	12	0.82%	1.32%	154,656,527
Price (T. Rowe) Hlth Sciences	PRHSX	Sector - Health/ Biotechnology	44	7	1.11%	0.63%	137,360,211
Price (T. Rowe) New Amer Growth	PRWAX	Sector - Other	42	2	0.94%	0.35%	30,703,951
Vanguard Specialized-Gold	VGPMX	Sector - Precious Metals	30	1	0.77%	1.03%	14,741,442
Vanguard Specialized-REIT Index	VGSIX	Sector - Real Estate	78	2	0.33%	0.29%	58,619,801
Price (T. Rowe) Sci & Tech	PRSCX	Sector - Tech/ Communications	88	1	0.87%	1%	1,181,214,033
Vanguard Specialized-Utilities	VGSUX	Sector - Utilities	92	10	0.40%	1.01%	380,935,069
Vanguard Index Tr Sm-Cap Idx Fd	NAESX	Small Cap	526	7	0.25%	1.33%	1,564,850,516
Vanguard Fixed-Long Term UST	VUSTX	US Government - Long	23	1	0.28%	0.33%	8,125,580
Vanguard Fixed-Sh Term Federal	VSGBX	US Government - Short & Interm	166	1	0.27%	0.66%	115,414,267
Vanguard Fixed-GNMA	VFIIX	US Government/ Agency	229	1	0.27%	0.71%	478,733,193
Vanguard Fixed-Interm Treasury	VFITX	US Treasury	43	1	0.27%	0.27%	19,240,585

Study Methodology

The study began with data covering over 10,000 mutual funds representing all mutual fund options open to investors in North America.

The following were eliminated from the sample:

• any fund that wasn't open to new investors
• institutional funds (defined as those requiring more than $25,000 initial deposit)
• funds which had been in open for less than a year
• funds without assets

Eliminating funds according to the above criteria left a total of 8,445 funds divided into 41 groups.

Benchmark Selection

A low-cost, broadly-diversified leader (benchmark) was selected from among funds in each of 41 investment categories. The benchmark fund was a broadly-diversified fund that ranked in the top of 50% for net asset value in its category. Benchmarks could not carry a front load and had to be available for purchase to any retail investor.

The difference in annual operating expenses between the low-cost leader and its rival funds in each category was calculated. That amount was multiplied by the total assets under management for each fund and totaled.

Average Returns Assumption

What individual investors should conclude about this study depends on how easy they believe it is to beat the average performance of funds in their category, before fees.

Dozens of empirical studies examining many decades of data in numerous markets have failed to show any reliable strategy for beating a market or asset class. When high fees are subtracted from their returns, and the principles of random walk and efficient markets are applied, the actively-managed mutual fund investor consistently under perform the market, on average.

Some investment analysts, typically professionals who earn their wages from recommending how to beat the market, maintain that investors can reliably beat the market. No major study has ever shown such strategies to work for the average mutual fund investor. (see here)

See a PDF of the full text (174 pages) of the study.