Understanding the Trend in Mutual Fund Expenses

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Mutual Fund Education

Understanding the Trend in Mutual Fund Expenses

David Dierking Sep 05, 2017

If you are wondering whether mutual funds are right for you at all, you should read why mutual funds, in general, should be a part of your portfolio.

The Race to the Bottom in Fees

Why the Trend Is Down

  • Greater awareness of fees – The internet has been a great resource for getting easily digestible information in front of investors. The objective, composition and fee structure of funds is accessible to everyone with just a few clicks as fund providers try to promote greater transparency. Also helping is the transition away from thick prospectuses full of legal jargon and towards fact sheets that hit all the important points in just a single page.
  • Fighting for investor dollars – Whenever there’s rapid growth in an industry, an influx of competitors looking to get in on the action is sure to follow. That’s no different in the mutual fund arena, which now boasts more than 8,000 different funds. The best way to cut through the noise and get attention for your product is to make it cheaper than the rest.
  • The size advantage – Bigger providers such as Vanguard and Fidelity are using the mammoth size of their asset bases to undercut the competition on cost. These companies can charge less and still make their money because they’re working with a much bigger pie. It’s no coincidence that Vanguard had greater net mutual fund inflows in 2016 than all other mutual fund complexes with net inflows combined.
  • Regulatory pressures – The Department of Labor’s fiduciary rule has put pressure on investment managers to always act in the best interests of their customers. That’s going to push fund companies to eliminate any egregious or excessive fees. The SEC has recently increased its crackdown on companies that purposely put their customers into higher-fee accounts and exorbitant 12b-1 marketing fees.
  • The proliferation of ETF alternatives – If mutual funds have become cheap, exchange-traded funds are cheaper. ETFs are on the brink of breaking 2016’s record inflows of $287 billion, and it’s only August. Many investors prefer ETFs for their ultra-low fees and greater trading flexibility. Some of the interest in ETFs comes at the expense of mutual funds. ETFs still control just a small percentage of the overall financial markets and should present considerable competition to mutual funds for the foreseeable future.

Check out our complete guide on mutual fund expenses and learn if you are paying too much on them.

How Investors Can Take Advantage

The Bottom Line

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