Securities lending revenue – Is your fund keeping something from you?

In a recent article in the Wall Street Journal® (When Funds Lend Securities, Who Wins?), Jason Zweig talked about a common practice in the mutual fund industry called securities lending.  The basic concept is that short sellers and other investment managers must, from time to time, borrow securities in order to carry out their investment strategies.  They will often borrow these securities from mutual funds and pay for the right to do so.  So what happens to the revenue created?  Often the fund company will keep the revenue to add to their bottom line, as the following line from the article indicated:

One possibility: “The people managing your money may sometimes be managing it more to benefit themselves than to benefit you,” says finance professor John Adams of the University of Texas at Arlington, one of the study’s authors.

Making sure that YOU are the one who benefits from this revenue is just one of the many jobs of your investment advisor.  It’s a question worth asking, because reducing investment expenses is more involved than just choosing funds with low management fees.