The year old ‘Mutual Fund Scandal’ exposed a number of problems within the mutual fund industry. The crux of the problem was the fact that mutual funds were treating large, multi-million dollar Hedge-fund traders differently than they treated their average investor. Some mutual funds allowed these Hedge funds to move in and out of the mutual fund quickly, often only remaining in the mutual fund for a few days at a time. This has been referred to as market timing.

The problem is that market timing it not illegal. The problem occurred when the mutual fund stated in it’s prospectus that it did not allow that activity while they secretly allowed privileged investors to do it anyway. For instance, large hedge funds would move millions of dollars into a mutual fund one day and sell it out the next. This gave the mutual funds increased fees while hurting the return of their regular investors.

In response, the SEC has proposed a number of rule changes. One rule would require mutual funds to impose a redemption fee when a sale occurs within five days of purchase. Unfortunately, many mutual fund companies have seen this as an opportunity to impose new fees that make it harder for you to move your money elsewhere. So the SEC’s involvement has had the unintended effect of increasing costs and reducing flexibility for the average mutual fund investor.

Many mutual funds, from big names to smaller funds, are now creating redemption fees if funds are sold within time periods much longer than what the SEC is suggesting. For example, some Vanguard international funds impose a 2% redemption fee if sold within 2 months. A few Vanguard mutual funds have a redemption fee of 1% for 5 years!

Even if you plan on keeping your money in a mutual fund longer term you can still be impacted. For instance, the real-estate sector recently dropped 15-20% in just a few days. If you had invested in Cohen & Steers Realty Shares and wanted to protect your money by selling that fund, you would have had to pay an additional 2% redemption fee if it occurred within 1 year of purchase.

Worse, the big mutual fund ‘supermarkets’ are imposing their own redemption fees. Charles Schwab One Source has begun charging a .75% redemption fee for sales within 6 months of purchase. TD Waterhouse charges .50% for sales within 90 days of purchase. Fidelity imposes a $75 fee or .75%, whichever is greater, if the redemption is done by phone within 6 months of purchase.

Interestingly, Fidelity does not impose a redemption fee on Fidelity’s own mutual funds! This begs the question—if short-term trading is so bad then why doesn’t Fidelity impose the same redemption fees on Fidelity mutual funds?

The bottom line is that redemption fees cause you to lose flexibility. Let’s say unexpected events, good or bad, cause you to need premature access to your money. Or maybe you just need to adjust your portfolio. Worse yet, what if we have another terrorist attack a few months down the road? These new fees mean you’ll have to pay a penalty to access your money.

The financial services industry’s goal is to reduce their costs and increase client retention by making it harder for you move your money elsewhere. My goal is to manage my clients’ money in such a way that protects what they’ve worked so hard to acquire without limiting their flexibility.

That’s why I will be moving my client’s money away from mutual funds over the next month or so. It is no longer in their best interest to remain in mutual funds. Instead, I will be utilizing Exchange-Traded Funds (ETFs). They offer wonderful diversification, flexibility and low transaction costs. Plus they can be sold at any time during the trading day, a terrorism protection that mutual funds can’t offer.

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at http://www.guardingyourwealth.com