Mutual fund shareholders are paying their managers less today in fees than they were 20 years ago or even last year. The increasing demand for low-cost funds coupled with increasing competition in the
According to data from the
For example: In 1990, investors on average paid 99 basis points- or
So what's spurring the big drop off in pricing?
ICI's data reveals that expense ratios, which include fixed costs such as transfer agency fees, accounting and audit fees, often vary inversely with fund assets so as fund assets rise, these fixed costs become smaller relative to those assets and vice versa. Also, the shift by investors toward no-load funds, particularly institutional no-load share classes, which have lower-than-average expense ratios, have also driven down fees.
In addition, mutual fund expenses have been pushed down by economies of scale and competition within existing and new mutual fund sponsors even as the number of mutual fund users has skyrocketed.
According to the ICI, the number of households owning mutual funds has more than doubled since 1990, going from 23.4 million in 1990 to 52.3 million in 2011. During the same period, the number of shareholder accounts rose from 61.9 million to more than 275 million.
Finally, ICI's research reveals that mutual fund shareholders are looking for funds on the cheap. The simple average expense ratio of equity funds was 143 basis points in 2011 but that's not what shareholders paid for these funds. Rather, the average expense ratio that equity fund shareholders actually paid was considerably lower: just 79 basis points. Equity managers should also note that as of year-end 2011, equity funds with expense ratios in the lowest quartile managed 72% of equity funds' total net assets, while the remaining 75 percent of equity funds held only 28% of total net assets, according to ICI.
In a separate research,
"Costs have come down because of appreciation, inflows, and a shift to lower-cost funds. Yes, there have been some fee cuts over the years–most notably Vanguard's lowered investment minimums for Admiral share classes. But it's the choices made by investors that have had the greatest impact. Investors have generally invested new money in lower-cost funds within a category. In addition, the growing popularity of bond funds has meant that money is flowing toward the lowest-fee asset class, thus lowering the overall rate."
In his research, Kinnel said his firm grouped funds into quintiles based on their fee level relative to their category peer group and, as a result, the cheapest quintile funds drew in
Kinnel also noted that the drop in fees for domestic equity funds was surprising given that the group was overall bleeding assets. Fees fell to 74 bps in 2011 from 78 bps in 2010. International-equity funds also saw a big expense ratio drop of four basis points from 97 bps to 93 bps during the same period. However, the typical investor paid an additional four basis points for his alternatives fund from 129 bps to 133 bps.
Fee discounts among fund firms have continued in the first half of 2012. Last month, the RiverFront Global Allocation Series of mutual funds reduced the fees for three of its funds including the
And earlier this month, in a nod to the competitive pricing pressure roiling the financial services industry,
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