Investors love ever-shrinking fees on investment products. Product sponsors, on the other hand, don’t share that love. But do falling funds fees always result in a zero-sum win for investors?

The asset-weighted average total net expense ratios for mutual funds and exchange-traded funds declined from 62.3 basis points in 2014 to 46.0 basis points in 2018, according to Cerulli Associates, a global research and consulting firm. This downward trend is fueled on the one hand by growing demand for low-cost, index-based products such as ETFs. It’s also driven by increased use of institutional and platform mutual fund share classes that frequently exclude commissions, 12b-1 fees (which pay for a fund’s marketing and distribution) and sub-transfer agent (sub-TA) fees that help pay for administrative and record-keeping expenses incurred by distributors such as broker-dealer platforms and RIA custodians. Platform share classes are those developed specifically for fee-based managed account platforms. Funds that exclude two—or all three—of the commissions and fees are known as double-zero or, in some cases, triple-zero share classes.

In a recent report that examined the ramifications of mutual fund and ETF fee compression, Cerulli said fees have more room to fall. Brendan Powers, associate director at Cerulli, says that particularly within index funds, product manufacturers see cost as a competitive edge and increasingly use fees as a marketing tool.

In addition, Cerulli data finds that 65% of financial advisors agree they intend to use lower-cost share classes, which should boost adoption of both institutional and platform share classes. The chief reasons why more advisors are choosing lower-cost share classes are their fiduciary obligation to their clients (71%), shifting to fee-based accounts (53%) and the growing availability of lower-cost share classes (44%).

The race to the bottom regarding fees appeared to reach the basement floor with the recent introduction of zero-fee funds. Fidelity Investments last year rolled out four no-fee, index-based mutual funds. And this past spring, online lender and personal finance site Social Finance Inc. launched two ETFs with zero fees where the 0.19% expense ratio on both products will be waived until at least June 30, 2020.

Then came the previously unthinkable: a negative-fee ETF. The Salt Low truBeta US Market Fund (LSLT) began trading in March with an expense ratio of 0.29%, but in May its managers received approval from the Securities and Exchange Commission to pay investors 50 cents for every $1,000 invested. That translates to a fee of minus-0.05%, which will be in effect for a year.

Those moves made for flashy headlines, but more than anything it’s the drip-drip inevitability of fee compression that’s changing an industry dynamic by altering the flow of revenue sharing between asset managers and distributors. There has long been a kickback from asset managers to wealth managers where the former pays the latter various fees to cover fund marketing costs, as well as the infrastructure costs that support a distributor’s investment platform.

Cerulli estimates that 12b-1 fees generated $9.6 billion in 2018, down from $10.5 billion in 2017. Some of this decline is due to total mutual fund assets falling, but the sheer volume of net flows moving out of most share class types that include 12b-1 fees and into institutionally priced share classes without the fees is also a factor.

According to Cerulli, lost 12b-1 distribution fees have led to new revenue-sharing deals between many asset managers and distributors that can include various forms of profit sharing, payments for non-transaction-fee platform space, payments for data, or even conference sponsorship.

First « 1 2 » Next