As mutual fund managers face increasing calls to cut their fees, they're asking no-transaction-fee platform providers such as Schwab and Fidelity to cut theirs as well — or at least figure out a way to let investors know what part of their expense ratios go toward distribution.
No-transaction-fee platforms, which let investors buy and sell mutual funds for no fee, have been a big hit with investors. And while they are free for investors, funds pick up the cost.
"People look at a 1.25% expense ratio and think that's what the manager is getting paid," said Neil Hennessy, portfolio manager and chief investment officer of the eponymous fund company. "In reality, it costs between 0.40% and 0.90% to manage the money, and a large part of the difference is because of the third-party platform fees that are charged to mutual fund companies and/or shareholders."
Schwab, for example, charges 40 basis points to be on its No-Load No Transaction Fee platform, and rivals Fidelity and TD Ameritrade charge about the same. The funds pay the fee, which is reflected in their overall expense ratio. At a time when investors are increasingly critical of expense ratios, managers are not only resenting paying the platform fees, but the effect those fees have on expense ratios.
Heather Fischer, vice president of mutual fund and ETF platforms at Schwab, acknowledged that some funds are struggling with how to tell investors the impact platform fees have on expense ratios.
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Falling fees are a trend everyone is aware of, and everyone agrees this is a good thing for investors," she said.
But what about breaking out the components of the expense ratio for investors?
"The devil's in the details," Ms. Fischer said. "It's not the costs and breaking them down, it's where to put it on the statement. We want to find a way that's clear, transparent and simple. We're in the very early stages of the dialog about that with funds."
Funds attempted to produce a share class devoid of distribution costs through so-called clean shares in the wake of the Department of Labor's fiduciary rule. Unfortunately, there's no industry consensus as to what, precisely, constitutes a clean share. The
American Funds still offers clean shares, and Bradley J. Vogt, chairman of Capital Research Company, said they intend to keep offering them, despite the apparent demise of the rule.
"We've always been supporters of choice and transparency — those have been our true norths," he said. "If you externalize more non-investment fees, then you get a more apples-to-apples comparison."
And even exchange-traded funds don't fully disclose distribution costs in their expense ratios, said Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA. Trading commissions and the ETF's bid/asked spread are being borne by the investor, he noted.
"Lower ETF expenses are still a savings, but what gets lost is the total cost of owning the portfolio."
Fidelity and Schwab both say the fees they charge are a good value for funds and investors.
"The fund families that are on our platform compensate Fidelity for the administrative and shareholder services which we provide on their behalf," Fidelity spokeswoman Nicole Abbot said in an email. "Specifically, the services include processing trades, dividends, delivering required documents, supporting client inquiries and problem resolution, web and trading infrastructures, compliance, and reporting to the fund companies. If we didn't provide those services, the fund companies would have to provide them themselves at their own cost."
Ms. Fischer noted that fund companies can choose to go on Schwab's transaction fee platform if they don't want to pay the fee for the NTF platform.
"They have to make sure the value is aligned with the cost," she said. "Depending on how they feel, their value proposition might be worth more on the transaction-fee platform."
