Schwab: Lower minimums, uniform pricing for funds boost flows

The changes increase mutual funds and ETFs' appeal to small retirement plans, too

Feb 12, 2018 @ 4:37 pm

By John Waggoner

Charles Schwab & Co., which dropped the minimum investment on its funds and ETFs a year ago, has found that the move not only means greater flows from smaller investors, but a surprising uptick in assets from small retirement plans.

Since eliminating minimums and offering uniform pricing on its market-cap index funds, Schwab says it has seen big growth in inflows to its index funds and ETFs from accounts with balances of $50,000 to $100,000. In the past 12 months, inflows from that segment of investors grew to $964 million from $593 million. Mutual fund inflows grew to $249 million from $48.5 million, and ETF inflows grew to $714.9 million from $544.9 million.

"We've always had very competitive pricing, and when we further simplified pricing, we've seen accelerated growth that was pretty rapid," said Jonathan de St. Paer, senior vice president and head of strategy and product supporting Charles Schwab Investment Management Inc.

Peter Jones, a pension consultant at Wellington Consulting Services, said Schwab's uniform pricing for its mutual funds and ETFs also boosted its funds' attractiveness for smaller pension plans. "A number of new regulations, as well as landmark court cases, made it clear to plan sponsors that it behooves them to get the lowest-cost share classes and funds, if for no other reason than their personal liability is on the line," he said.

The low minimums are also attractive to defined-contribution plans that offer a brokerage account. "Those small account minimums are just golden," Mr. Jones said. "[Participants] are like kids in a candy store."

Mutual funds and ETFs were designed for small investors who couldn't afford to cobble together a diversified portfolio on their own, but most direct-sold funds require relatively high minimum initial investments for taxable accounts. The minimum initial investment for Vanguard Total Stock Market Index fund investor shares is $3,000, for example, while Fidelity's Total Market Index Fund investor class requires a $2,500 minimum initial investment.

Many fund companies that once required low or no minimum investments, such as American Century, have upped their minimum initial investments, saying that small accounts were expensive to service and small investors typically didn't add to their small accounts.

But thanks to the internet, smaller accounts have become much less expensive to service, Mr. de St. Paer said. Twenty years ago, fund companies were printing thick prospectuses and updates and mailing them to customers. Now most documents are delivered far more cheaply electronically.

"The world has gotten more efficient, but share class structure has not caught up," he said.

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