Fund Fees Sink to Lowest Level in 25 Years, but Why?
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Individual investors are paying less to own mutual fund shares, as fees and expenses have hit their lowest level in more than 25 years, according to research published Tuesday by the Investment Company Institute. In 2006, fund shareholders, on average, paid 107 basis points or 1.07 percent of assets in fees and expenses, including loads, which is four basis points lower than in 2005. Expense ratios on equity funds declined a combined 7 basis points during 2005 and 2006, the ICI says. If that rate of decline were to be sustained, stock fund investors would save roughly $4.6 billion a year.
“The continuing decline in mutual fund fees and expenses is a direct result of investor preference for lower-cost funds and increased competition among fund companies,” said Sean Collins, ICI senior economist, in a prepared statement. The drop in fees can also be seen in fixed-income, as fees on bond funds dropped to 83 basis points in 2006 from 88 basis points in 2005. And money market funds saw a 2-basis-point dip over the period.
In recent years, many fund companies have lowered management fees, added breakpoint discounts for investors who purchase a certain number of shares and even waived sales loads for 401(k) plan participants. This is exactly how mutual funds are supposed to work, passing the savings from economies of scale on to the investor.
But one academic says that the fee cuts are not a result of increased competition or responsible boardroom governance, but rather fallout from the fund trading scandal unearthed by New York Attorney General Eliot Spitzer. “The fund industry had easy pickings fleecing investors for decades,” says John Freeman, a law professor at the University of South Carolina and a frequent critic of mutual funds. “It’s harder to find people to fleece now.”
Many of the big firms engulfed in the scandal were forced to slash prices for a period of five years under the terms of their settlements, including AIM, Alliance Capital, Janus, MFS, Putnam, he says. And investors, having been burned by market-timing abuses and poor returns in the past, are now more sensitive to fees than ever before. And they’re voting with their feet. “There’s a lot of pressure to offer no-load funds,” Freeman says. Further, he argues that the most expensive funds provide the lowest returns.
Freeman often rails against the fund industry, which he views as rife with conflicts of interest and lack of transparency. In his own research paper entitled “Mutual Fund Advisory Fees: The Cost of Conflicts of Interest,” he found thatfund firms charge up to $2 billion a year in 12b-1 fees on money market funds. He finds this laughable since marketing and ongoing support is really unnecessary when it comes to these rudimentary, non-actively managed funds. “They’re checking accounts,” he says. And the fund industry doesn't deserve credit for lowering fees. That's merely “spin” doctored by the industry's army of lobbyists, he adds. No matter what the reason for the lower fees, in the end, it’s good for fund shareholders.
