Investors are reaping billions in savings as they continue a two-decade migration to low-cost mutual funds and ETFs, but financial advisors may be pocketing a sizable chunk of that windfall, according to Morningstar.
The investment analysis and information company reports in its annual U.S. Fund Fee Study that the average asset-weighted U.S. fund fee declined from 0.40% in 2021 to 0.37% in 2022. While it may not seem like much, that price cut resulted in $9.8 billion in savings for investors, Morningstar estimates.
Those numbers continue a trend of more than 20 years that has seen investors abandon active mutual funds and other high-fee funds in favor of low-cost passive funds, ETFs and target-date retirement funds. During eight of the last nine years, the 20% of funds with the lowest fees accounted for all the net inflow into the funds market — $5.4 trillion. Meanwhile the remaining 80% of funds saw a decline of $2.6 trillion. In 2022, the net flow advantage of the cheapest 20% over the rest was $1.1 trillion.
Investors “disillusioned with active managers—and fed up with high fees and regular capital gains distributions” have been the main driver of the trend of declining fees and low-cost investing, according to Morningstar. Changes in the advice sector are also an important fact, the report says. To reduce costs, fund companies increasingly have stripped advice out of their fees, meaning more investors are turning to financial advisors for guidance, according to the report. The result is that a portion of the “savings” investors are seeing through lower fund fees is actually being rerouted to financial professionals. And advisors have been steering their clients to the low-cost funds to “in part, make more room for their own fees,” the authors write.
Report author Bryan Armour, Morningstar director of passive strategies research, offers this caveat: “Investors should be ever vigilant of what Vanguard founder John Bogle referred to as ‘the tyranny of compounding costs,’ and keep account of what they’re paying for their investments and advice.”
Morningstar noted that fund fees have been falling for more than 20 years. In 2022, the asset weighted average expense ratio of all U.S. open end mutual funds and exchange traded funds was 0.37%, compared with 0.91% in 2002. Passive funds are the price-cut leaders. Asset-weighted fees for passive funds averaged 0.12% in 2022, down 10% from the previous year, and down 60% since 1994. Asset-weighted fees for active funds averaged 0.59% in 2022, down 3% since 2021, and down 40% since 1994.
Broad-based market-capitalization-weighted index funds have been locked in a “fee war,” the report notes. Fidelity launched a lineup of zero-fee index mutual funds in 2018, and other asset managers have followed suit. Although the reduction in fund fees will likely slow, downward pressure is unlikely to abate, Armour writes. “The same forces that spawned these low-cost funds tracking major indexes have begun to spread to other corners of the fund market, areas where there is still ample room for fees to fall further.”
In a four-decade career in journalism, Ed Prince has served as an editor with many of New Jersey’s leading newspapers, including the Star-Ledger, Asbury Park Press and Home News Tribune.
