How financial advisors are contributing to fee compression

Fund fees continue to fall — and financial advisors can take some credit.

After nearly two decades of steady decline, the average asset-weighted fee in 2018 fell to .48%, three basis points less than the previous year, according to Morningstar’s 2018 fund fee study. Indeed, clients are paying about half as much to own funds as they were about 20 years ago, the study found.

Financial planners’ transition from commission-based pricing to a fee-based pricing model, has played a role in the price decline, according to Ben Johnson, director of passive funds research at Morningstar.

“In order to make more room for their fees, [advisors] have to squeeze those fees out of the products they use to build portfolios,” Johnson says.

Many advisors regard selecting lower priced funds consistent with a client’s best interest. “If you’re a fiduciary do you want to charge a fee on top of a fee?” asks Lori Zager of 2X Wealth Group, a team at Ingalls & Snyder.
Clients saved an estimated $5.5 billion in fund expenses last year, according to Morningstar’s study, the second largest year-over-year decline since 2000. The average payment an investor made in open-end mutual funds and ETFs was .48%, down three basis points from 2017.

In addition to pressure from advisors, fee compression has stemmed from a variety of factors aside from a push from advisors, including competition among asset managers as well as client awareness.

Clients have come to the realization that, just because a fund costs more, it may not be a better product, according to Johnson.

“We tend to think the more we pay for something, the more we are going to get, the higher quality we are going to get from that item,” he says. “When it comes to investment products, they tend to flip conventional notions of money on their head.”

Advisors are also paying more attention to how they select share classes. Share classes with embedded costs, such as loads and 12b-1 fees, are losing popularity, according to the Morningstar study.

Regulators have also been focusing on share class selection, advising broker-dealers and firms to closely watch what they are recommending to clients.

FINRA and the SEC have leveled more than 50 enforcement cases involving share classes of mutual funds over the last five years, including a self-reporting initiative, where 79 firms voluntarily agreed to repay overcharged clients.

In general, clients are becoming more savvy with the price tags on their portfolios.

“If there was anything surprising, it is just how shrewd clients have become when it comes to what they are paying for funds,” Johnson says.