Fund fees have fallen in most countries around the world over the past three years, in the latest sign of active managers feeling the heat as investors capitalise on a growing range of less expensive products.
Asset flows into lower-cost funds have helped drive a broad decline in fees, according to researchers at Morningstar, as have price cuts for existing products. The financial data company found that fund fees had dropped in the majority 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 to cheaper funds and the repricing of existing investments,” said Grant Kennaway, head of manager selection at Morningstar.
The findings from Morningstar indicate that investors in several countries are taking advantage of a wider range of options when it comes to picking funds, and are becoming more selective based on costs — a trend that in turn has put the onus on money managers to justify what they charge.
Fees have been a controversial topic in the funds industry for decades. Whereas managers regularly used to charge more to manage clients’ money, fees have dropped by more than a quarter in major markets such as the US since 2010. Regulatory interventions and the rise of passive investment vehicles have pushed active managers to slash costs to compete, while putting strain on their margins.
But in a minority of regions, product fees have remained stubbornly high — namely in those places where banks continue to dominate fund distribution, including Italy, Taiwan, Hong Kong and Singapore. There, costs show no sign of falling due to market forces alone, according to Morningstar.
Unbundled fee structures — where fees paid to advisers, platforms and fund managers are broken down for clients — have improved transparency in many locations. But the use of “upfront fees and the high prevalence of embedded ongoing commissions across 18 European and Asian markets can lead to a lack of clarity for investors”, said Kennaway. “We believe this can create misaligned incentives that benefit distributors, notably banks, more than investors,” he added.
For equity funds in the Netherlands, one of Morningstar’s top-rated countries, the median expense ratio — weighted for share classes available to retail investors in a particular market — ranged between 0.55 and 0.77 per cent. But in Italy, the range was 1.93 to 2.13 per cent.
Morningstar added that the prevalence of expensive offshore funds over cheap local alternatives in countries with persistently high fees has exacerbated the pricing situation, though investors who select funds online in those markets will fare better than those who go via their banks.
In addition to the Netherlands, the survey’s top-rated countries were Australia and the US, where fees tend to be unbundled. These nations have ranked highly in Morningstar’s reports for the better part of the past decade, and in the latter two countries, unbundled fees have particularly enhanced the appeal of low-cost passive funds, according to the study.
Korea, Norway and South Africa improved their performance on costs and were deemed above average by Morningstar. In at least 17 markets, local equity and diversified funds reported lower fees compared with the last study in 2019.
The shift towards lower fees is rooted partly in past backlashes against a lack of transparency in commission structures. In the early 2000s, US regulators cracked down on slanted marketing practices that saw brokers failing to tell customers they were recommending high-fee funds that paid them richer commissions. In one of the largest enforcement actions at the time, Morgan Stanley was fined $50mn in 2003.
Additional reporting by Brooke Masters