US attorney and human rights activists, Larry Klayman (pictured), is taking legal aim at a the mutual funds industry.
Klayman charges that unfair pricing policies of most mutual funds are costing investors, many of them seniors living on fixed income, more than USD10 billion a year. "The industry better equalize its pricing or risk a lawsuit," he said.
"The playing field needs to be level so investors aren’t paying differently like airline passengers do according to when they book flights. New mutual fund purchasers and those liquidating mutual fund shares have an unfair price advantage over existing shareholders.
"New shareholders are being partially subsidised by existing shareholders and regulators don’t seem to mind an unequal sharing of the stock brokerage fees that mutual funds incur from ongoing buying and selling of portfolio securities."
According to Klayman, long-term shareholders also are bearing costs caused by frequent trading and market timing by short-term investors.
As money is shifted into and out of a fund by a shareholder engaging in frequent trading, a fund incurs costs for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are born by all fund shareholders, including the long-term investors who do not generate them. Frequent trading also interferes with an advisor’s ability to efficiently manage the fund, he added.
Researchers have proposed a remedy that is elegantly simple to apply called the Sacks Equalisation Model (www.sacksmodel.com), a patented algorithm designed to level the mutual fund investment field.
In their research paper, "A New Method For Computing Mutual Fund NAV In Light Of Liquidity-Induced Transaction Costs," Professors Miles Livingston of the University of Florida and David Rakowski of Southern Illinois University Carbondale, says the model takes into account net value (NAV) of the mutual fund and accumulated stock brokerage fees.
The accumulated commission fees are then added to the net asset value per share prior to purchase of shares and subtracted from the net asset value per share prior to the liquidation of the shares, thereby leveling the field. And those monies flow back into the fund for the benefit of all shareholders.
Moreover this solves the problem of maintaining the true asset value for existing shareholders when there are rapid share liquidations, thereby protecting the true asset value of remaining shareholders and reducing operating costs making mutual funds from .5% to 1% more profitable per year.
The model was developed by retired stockbroker Seymour Sacks.