By GRANT KENNAWAY
Our analysis of 26 markets’ mutual fund fees and expenses reveals that, by and large, the investing experience is improving. For instance, a majority of markets’ locally domiciled equity funds have reduced fees, asset managers are cutting fees to vie for market share, and there’s an industry-wide move toward fee-based advice. These are all spurring the demand for lower-cost funds.
These findings and more are detailed in the Fees and Expenses chapter of the 2019 Global Investor Experience Study, which published on Sept. 17.
Below, take a high-level look at what mutual fund fees and expenses look like in markets that made a move in terms of grade or debuted this year.
Canada: Commission-based advice’s asset-weighted median fees remain high
Canada’s grade improved from Bottom to Below Average in the study, reflecting increased availability and uptake of commission-free share classes as well as the insignificance of front loads.
However, the grade remains held back by asset-weighted median fees that are, at times, highest of all markets in this study. For commission-based advice, investors typically pay a 1.00% retrocession, or embedded trailing commission, for equity funds and 0.50% for fixed-income funds, though these numbers can vary slightly by fund provider.
It is becoming more common for investors to pay for advice separately from trailing commissions, although the extent of this change varies somewhat by asset class. Plus:
Asset-weighted median fees for share classes sold via Commission-based Advice come in higher than the overall medians.
The medians for share classes sold via the Fee-based Advice channel are substantially lower; and
Funds in the Do-It-Yourself channel typically carry a trailing commission of 0.25% or less, which the discount broker usually collects.
China: Low fixed-income funds medians improve the market’s grade
China received an improved grade of Average (up from Below Average), partly because of a relatively low asset-weighted median for fixed-income funds of 0.44%. This lower median is owed to the proliferation of low-fee, short-duration fixed-income products that have attracted assets.
Still, China’s grade continues to be held back by investors’ inability to avoid paying loads and retrocessions when not receiving advice. Purchasing investment advice directly, rather than through loads or trails, is not a known practice for individual investors in China.
Almost all funds are associated with retrocession fees and loads, but investors have access to money market funds and a few fixed-income funds without loads.
Changes to the regulations on distributor commission disclosure in China are under way, with a proposal issued by the regulator in 2019 to require fund sales agents to disclose commissions and trailer fees to investors.
India: Direct plans improve the investor experience
India’s grade improved to Average from Below Average in this study. Factors that contributed to this overall score include:
A relatively lower asset-weighted median fee of 0.54% for fixed-income funds, reflecting traction in commission-free share classes. At the same time, allocation and equity funds saw relatively higher asset-weighted medians: 1.78% and 1.93%, respectively.
Investor-friendly regulations banning front loads and up-front commissions and capping inwestment charges contributed positively.
India largely follows a bundled expense ratio structure with commissions embedded into the expense ratios of funds. Investors do not incur any additional costs such as advisory fees, platform fees, or front-end loads when purchasing distributor share classes.
In response to regulation, Indian fund companies have also been launching commission-free share classes, known as direct plans, without up-front or trailer commissions. These share classes benefit investors by providing lower expense ratios than distributor share classes, and low investment minimums equivalent to those of the distributor share class. These factors make direct plans accessible to all investors.
Assets in direct share classes have been rising gradually but the majority of individual investors still invest through a commission-embedded plan, resulting in India’s relatively higher asset-weighted median fees.
Italy: Excessive front loads lower the market’s score
Italy fell from a Below Average to a Bottom grade in this study based on individual investors’ routinely being subject to front loads and retrocessions, as well as high asset-weighted median expenses across the board.
In Italy, individual investors are left to negotiate stated loads with the sales agent. Funds or share classes with no loads are accessible to Italian investors but are often more expensive in terms of base fees.
Though companies state a maximum front and exit load in their official documents, the actual amount charged to investors varies and is often scrapped altogether. It is relatively rare for investors to pay financial-advice fees other than through commissions or retrocessions. Investors purchasing funds without advice can locate products without loads or trail commissions, but these constitute a small percentage of investor assets.
Funds without trail commissions are technically registered for sale in Italy but are not easily accessible for the average retail investor given that fund distribution is dominated by intermediaries, notably banks.
Mexico: Mixed bag for our inaugural analysis of the market
The Mexico market was a new addition to the study this year. Mexico received an inaugural grade of Below Average, due to high equity and fixed-income asset-weighted medians and the difficulty Mexican investors face in avoiding trailing commissions when purchasing funds without advice.
In Mexico’s closed-fund market:
Allocation funds have an asset-weighted median of 1.00%, which scores well against the domiciled and available-for-sale universes.
Equity and fixed-income funds have medians of 1.85% and 1.25%, respectively, which are among the highest for locally domiciled funds in this study.
In Mexico, mutual funds establish a maximum sales load by prospectus, but distributors set the front-load ultimately charged to investors, which may vary from one institution to another.
Retail investors work directly with advisers at large financial institutions, as independent financial advisers cater almost exclusively to high-net-worth individuals. Investors may pay financial-advice fees outside of bundled-fund expenses, although this is not common practice.
Funds without front-loads or trailers are available in Mexico but constitute only a small part of retail investors’ assets. Plus, Mexican investors are only able to access funds domiciled in Mexico.
GRANT KENNAWAY is Global Practice Leader of Manager Research at Morningstar.
This article first appeared on Morningstar.com and is republished here with Morningstar’s permission.
You can find more on the latest research here: