Falling fund fees are forcing advisers to check under the hood

Falling fund fees are forcing advisers to check under the hood
The trend toward lower fees saved investors nearly $6 billion last year, according to data from Morningstar
JUN 10, 2020

As the asset management industry continues to compete on price, investors are generally reaping the rewards.

According to the latest research from Morningstar, the multi-decade trend toward cutting fund expense ratios and cheaper fund options saved investors nearly $6 billion in fees last year alone.

The research shows the asset-weighted average expense ratio of all U.S. open-end funds and ETFs has been cut nearly in half over the past two decades to 45 basis points from 87 basis points in 1999.

That average is also down from 48 basis points in 2018.

The assets weighted average expense ratio for actively-managed funds was at 66 basis points in 2019, down from 68 basis points in 2018.

For passive, index funds, where the bulk of the asset flows have been heading, the average expense ratio fell to 13 basis points in 2019, down from 14 basis points in 2018.

“The epicenter of the outflows has been from higher-cost active funds, and a lot of that money has been migrating to not just low cost index funds, but very low cost index funds and ETFs,” said Morningstar analyst Ben Johnson.

“The upside for investors is billions and billions of fee savings, which are both immediate and compound over time,” he added.

If there is a downside to a race to the bottom in terms of fees, it might be that it puts more pressure on investors and financial advisers to dissect the funds and portfolio strategies to determine if cheaper is actually better.

“As fees converge at ever lower levels, people will only look at fees,” Johnson said. “As fees get lower, they will matter less, and what really matters is the fund’s process.”

As an example of how investors and advisers are focused on fees, Morningstar found that in 2019, the cheapest 20% of funds had $581 billion worth of net inflows, while the remainder of funds suffered $224 billion in net outflows.

3 Questions: Ben Harrison on how clients will measure advisers during the pandemic

3.06 min watch

Todd Rosenbluth, director of mutual fund and ETF research at CFRA, said the pursuit of lower fees has partially been masked by a focus on the trend toward passive over active management.

“Many people think of active funds simply losing share to passive, but investors are increasingly focusing on fees and staying loyal to cheaper active strategies as they stand a better chance of repeating their success,” he said. “The growing array of alternatively-weighted passive funds has also given investors strong low-cost choices that provide some similar benefits of active management focusing on quality and valuations.”

Latest News

In an AI world, investors still look for the human touch
In an AI world, investors still look for the human touch

AI is no replacement for trusted financial advisors, but it can meaningfully enhance their capabilities as well as the systems they rely on.

This viral motivational speaker can also be your Prudential financial advisor
This viral motivational speaker can also be your Prudential financial advisor

Prudential's Jordan Toma is no "Finfluencer," but he is a registered financial advisor with four million social media followers and a message of overcoming personal struggles that's reached kids in 150 school across the US.

Fintech bytes: GReminders and Advisor CRM announce AI-related updates
Fintech bytes: GReminders and Advisor CRM announce AI-related updates

GReminders is deepening its integration partnership with a national wealth firm, while Advisor CRM touts a free new meeting tool for RIAs.

SEC charges barred ex-Merrill broker behind Bain Capital private equity fraud
SEC charges barred ex-Merrill broker behind Bain Capital private equity fraud

The Texas-based former advisor reportedly bilked clients out of millions of dollars, keeping them in the dark with doctored statements and a fake email domain.

Trump's tax bill passes senate in hard-fought victory for Republicans
Trump's tax bill passes senate in hard-fought victory for Republicans

The $3.3 trillion tax and spending cut package narrowly got through the upper house, with JD Vance casting the deciding vote to overrule three GOP holdouts.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.