Falling fund fees are forcing advisers to check under the hood

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.

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.”