Latest Technology Lowers Expense Ratios

As with most everything in life, technology is playing an important role in allowing fund companies to lower their expense ratios.

A key components of a fund's expense ratio is administrative costs for recordkeeping, mailings and compliance with expenses for these required functions being lowered thanks to asset managers embracing digital offerings both internally and with third parties.

"The streamlining of operations is probably the largest factor in fund companies being able to reduce their expenses," says Mark Israel, vice president of business consulting at Sapient Global Markets, a consulting firm that works with asset managers to reduce technology expenses both internally or through hiring third party administrators. "We spent a lot of time creating more efficient processes for fund companies."

Israel says some of the vendors fund providers are utilizing through Sapient to help achieve cost-savings with technology include Charles River Development IMS, Citadel Solutions and Bloomberg. He added that an administrative area asset managers are particularly focused on trying to reduce costs on to help bring down expense ratios is post-trade procedures such as a performance-cost analysis.

Russel Kinnel, director of research at Morningstar, says many of the expense ratio drops at fund companies are automated based on meeting certain performance and assets benchmarks. He says however that since investors are paying more attention to fees, fund companies would be wise to come up with ways to bring expense ratios down even slightly and that streamlining technology is one way to accomplish this.

"Low fees are good for business," says Kinnel. "It's a competitive advantage for sure if you can deliver efficiencies for your clients."

In total, 195 funds had expense ratio drops from 2012 to 2013, according to data provided by Morningstar. The largest drop was the Fidelity Small Cap Stock at 41-basis points to 0.69%.

Important for Competition

Jacksonville Beach, Fla.-based Intrepid Capital Funds was able to lower expense ratios on two funds late last year which the asset management company's CEO Mark Travis attributes partly to its custodian U.S. Bancorp Fund Services achieving administrative savings through enhanced technology. Travis says keeping expense ratios down through innovative technology procedures is especially vital to newer firms like Intrepid, which was formed in 1994.

"For many newer firms, they better figure out technology and how to be as efficient as possible," says Travis. "To be competitive long-term, firms like ours that are newer and growing are going to have to continue to compress administrative expenses to be as competitive as possible."

Bob Kern, executive vice president for business development at U.S. Bancorp Fund Services, says a big factor that has allowed it to help asset managers achieve savings on administrative expenses is through integrated compliance testing conducted through Charles River Development IMS. U.S. Bancorp has also focused the last five years on producing automated financial statements through a Unity platform offered by Pittsburgh-based Confluence. Further efficiencies U.S. Bancorp provides to 308 mutual fund families it serves include automated wash sale transactions.

"Automation] allows fund companies to manage their productivity better and improve their service model to the clients," says Kern. "The savings are both economic as well as creating efficiencies."

Kern says U.S. Bancorp will soon be rolling out a product that improves expense processing for mutual fund families. He adds that emailing more literature to investors in lieu of physical mail has also achieved cost savings for fund managers.

Eze Software Group, which was founded in 2013 and provides technology support for front, middle and back officer operations, works with more than 500 asset manager clients to help execute "straight-through processing." Robert Keller, chief product officer at Eze, says fund companies becoming more automated can achieve savings that will trickle down in being able to reduce fees.

"A firm has a lot more opportunity to reduce management fees because their operations are more efficient," says Keller. "We can help firms become a lot more efficient and automated."

Todd Rosenbluth, director of the ETF & Mutual Fund Research at S&P Capital IQ, says mutual fund expenses ratios have been modestly trending downward for the past decade in response to momentum from lower cost ETF platforms. He says finding efficiencies through technology is one way that fund companies can bring down their costs associated with running investment products. "Anything that can be done to streamline the administrative process while still being compliant can help shave pennies off an expense ratio," says Rosenbluth. "Technology efficiencies can help bring costs down."

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