Some clients I work with come to see me after working with another financial advisor. More often than not, I find the advisor has recommeded mutual funds that have no business in anyone's portfolio.
Like any organization, a mutual fund company has expenses that are passed along to the consumer. The average mutual fund has expenses that come to 1.25% of your investment.* That sounds like a low number, right? Wrong. Some index funds have expenses as low as .04%. Picking the expensive funds over the index funds could cost you as much as $24,200 over a 20 year period in extra expenses.
So what are the expensive mutual fund companies doing with all that extra money, anyway? They would tell you they are creating value for their shareholders by making wise investment decisions and generating superior returns. What they won't be so quick to tell you, however, is how they take very high salaries, how they often pay sales commissions to the advisors that sell their funds to unsuspecting investors, or how they mostly underperform the broader market over long periods of time.
So what's the moral to the story? The vast majority of mutual funds are a rip off, so select them carefully. Pay attention to the expense ratios, and ask your advisor if she receives any compensation if you invest in the funds she recommends. Those investments might be better for her wallet than for yours!
*Mutual Fund Expense Ratio Trends, Morning Star, June 2014