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Exit fees In Times Of Market Stress: A Solution In Search Of A Problem
People here have raised some of the same questions, some of which I've addressed. Appearing together in one article makes them look like potshots at something Investment News doesn't like, as opposed to a coherent position.
Two rationales for the fee - stabilize markets, and have people pay for the costs they create.
The editorial suggests that "Exit penalties might increase, not decrease, volatility." If that's true, what one wants is opacity - something that achieves the second objective (charging people for the costs they create) without people knowing on the day of the trade whether they'll get hit with a fee. That way, they wouldn't "simply sell earlier, which could then trigger more selling". So the editorial simultaneously complains about volatility that transparency would create and bemoans a lack of transparency that would avoid increasing volatility.
I wrote about both issues, selling early and lack of transparency, in my prior post. With a mutual fund, one can't "sell early", since a sale takes place at the end of the day, regardless of when the order is placed. Transparency can be achieved by triggering redemption fees based on market conditions rather than on fund conditions (which might not even be known until end of day).
The editorial's objection to redemption fees is even more specious. First, because it fails to call on funds to end their current practice of charging short term redemption fees. "An argument could be made that those funds should be able to pass those costs onto the very investors who are selling. But isn't that really a cost of doing business?"
Second, because while the quote above appears to address the issue of investors increasing costs, it really sidesteps it. If some shareholders cost the fund more, why is it unreasonable that they should be charged more? Why should the other shareholders subsidize them? It's not as though this is a cost of doing business that's being shared equally by all investors.
Isn't that why Vanguard has Investor and Admiral shares? Or why large trucks pay higher tolls on bridges than do automobiles? Where is the outrage, the railing at the unfairness of it all?
Comments
Two rationales for the fee - stabilize markets, and have people pay for the costs they create.
The editorial suggests that "Exit penalties might increase, not decrease, volatility." If that's true, what one wants is opacity - something that achieves the second objective (charging people for the costs they create) without people knowing on the day of the trade whether they'll get hit with a fee. That way, they wouldn't "simply sell earlier, which could then trigger more selling". So the editorial simultaneously complains about volatility that transparency would create and bemoans a lack of transparency that would avoid increasing volatility.
I wrote about both issues, selling early and lack of transparency, in my prior post. With a mutual fund, one can't "sell early", since a sale takes place at the end of the day, regardless of when the order is placed. Transparency can be achieved by triggering redemption fees based on market conditions rather than on fund conditions (which might not even be known until end of day).
The editorial's objection to redemption fees is even more specious. First, because it fails to call on funds to end their current practice of charging short term redemption fees. "An argument could be made that those funds should be able to pass those costs onto the very investors who are selling. But isn't that really a cost of doing business?"
Second, because while the quote above appears to address the issue of investors increasing costs, it really sidesteps it. If some shareholders cost the fund more, why is it unreasonable that they should be charged more? Why should the other shareholders subsidize them? It's not as though this is a cost of doing business that's being shared equally by all investors.
Isn't that why Vanguard has Investor and Admiral shares? Or why large trucks pay higher tolls on bridges than do automobiles? Where is the outrage, the railing at the unfairness of it all?