Fund fees have fallen in most countries around the world over the past three years, in the latest sign that active managers are feeling the heat as investors capitalize on a growing range of less expensive products.
Asset flows into lower-cost funds have helped drive a broad decline in fees, according to Morningstar researchers, as have price cuts in existing products. The financial data company found that fund fees had fallen in most of the 26 markets it studied since its last survey in 2019.
“The good news for global fund investors is that in many markets, fees are falling, driven by a combination of asset flows into cheaper funds and the appreciation of existing investments,” said Grant Kennaway, chief investment officer. of Morningstar managers.
Morningstar’s findings indicate that investors in various countries are taking advantage of a broader range of options when it comes to choosing funds, and are becoming more selective on the basis of costs, a trend that has in turn caused fund managers to money have the responsibility to justify what they charge
Fees have been a controversial topic in the fund industry for decades. While managers used to charge more to manage customer money, fees have fallen by more than a quarter in major markets like the US while putting pressure on their margins.
But in a minority of regions, product fees have remained stubbornly high, particularly where banks continue to dominate the distribution of funds, including Italy, Taiwan, Hong Kong and Singapore. There, costs show no signs of falling due to market forces alone, according to Morningstar.
Unbundled fee structures, where fees paid to advisors, platforms and fund managers are broken out for clients, have improved transparency in many places. But the use of “up-front fees and the high prevalence of built-in ongoing fees in 18 European and Asian markets may lead to a lack of clarity for investors,” Kennaway said. “We believe this may create misaligned incentives that benefit dealers, particularly banks, more than investors,” she added.
For equity funds in the Netherlands, one of Morningstar’s highest-rated countries, the median expense ratio, weighted by share classes available to retail investors in a particular market, ranged from 0.55 to 0. .77 percent. But in Italy, the range was 1.93 to 2.13 percent.
Morningstar added that the dominance of expensive offshore funds over cheap local alternatives in countries with persistently high fees has exacerbated the price situation, although investors who select funds online in those markets will fare better than those who go through their banks.
Apart from the Netherlands, the highest ranked countries in the survey were Australia and the US, where fees tend to be unbundled. These nations featured prominently in Morningstar reporting for most of the last decade, and in the last two countries, unbundled fees have particularly enhanced the appeal of low-cost passive funds, the study found.
Korea, Norway and South Africa all improved their cost performance and were rated above average by Morningstar. In at least 17 markets, local equities and diversified funds reported lower fees compared to the last 2019 study.
The move to lower fees is based in part on previous reactions against a lack of transparency in fee structures. In the early 2000s, US regulators cracked down on biased marketing practices where brokers failed to tell clients they were recommending high-fee funds that paid them richer commissions. In one of the largest execution actions at the time, Morgan Stanley was fined $50 million in 2003..
Additional information from Brooke Masters