Fund fee compression continues in most countries, says Morningstar

Latest research shows continuing effects of competition, but areas with bank-led distribution buck the trend

Fund fee compression continues in most countries, says Morningstar

Over the last three years, fund fees have declined in most nations around the world, the latest indicator that active managers are feeling the heat as investors take advantage of a growing selection of lower-priced solutions.

Researchers from global investment intelligence firm Morningstar have found asset flows into lower-cost funds, as well as price decreases for existing products, have helped drive a general reduction in fees. Since its last analysis in 2019, the financial data business discovered that fund fees had decreased in the majority of the 26 markets it examined.

“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,” Grant Kennaway, head of manager selection at Morningstar, told the Financial Times in a recent interview.

Morningstar's results show that investors in numerous countries are seizing the benefits of a broader selection of fund options and becoming more selective based on costs – a trend that has put the onus on money managers to justify their fees.

However, product costs have remained persistently high in a small number of jurisdictions, especially Italy, Taiwan, Hong Kong, and Singapore, where banks continue to dominate fund distribution.

Expenses there show no signs of reducing owing to market factors alone. In many places, unbundled fee arrangements have enhanced transparency by breaking out fees paid to advisors, platforms, and fund managers for clients, Morningstar adds.

Nevertheless, according to Kennaway, the usage 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.

"We believe this can create misaligned incentives that benefit distributors, notably banks, more than investors," he continued.

In the Netherlands, one of Morningstar's top-rated countries, the median cost ratio for equity funds — weighted for share classes available to retail investors in a particular market —ranged between 0.55% and 0.77%. Comparatively, the range in Italy was 1.93% to 2.13%.

Morningstar said that in nations with chronically high costs, the prevalence of pricey offshore funds over cheap domestic alternatives has aggravated the pricing problem, albeit investors who choose funds online in those areas will do better than those who go through their banks.

In addition to the Netherlands, the top-rated countries in the research were Australia and the United States, both of which have unbundled fees.

The study also showed that unbundled fees have boosted the appeal of low-cost passive funds in the latter two countries, which have rated strongly in Morningstar's surveys for the better part of a decade.

Morningstar rated Korea, Norway, and South Africa as above average in terms of cost performance. Local equity and diversified funds showed lower costs in at least 17 markets compared to the previous research in 2019.

The trend toward lower fees can be traced back to previous criticism against commission schemes that were not transparent. US regulators cracked down on slanted marketing techniques in the early 2000s, where brokers failed to inform customers that they were promoting high-fee funds that gave them higher commissions. Morgan Stanley was fined $50 million in one of the largest enforcement proceedings at the time.