Mutual fund fee datapoint of the day

By Felix Salmon
November 6, 2009
crunched the numbers, and it seems that the tumble in the stock market didn't have much effect on expenses:

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What happened to mutual-fund fees and expenses in the wake of the financial crisis? Lipper has crunched the numbers, and it seems that the tumble in the stock market didn’t have much effect on expenses:

Surprisingly, the median management expense for most asset classes was largely unchanged from 2008 levels; most exhibited changes of +/- a few tenths of a basis point.

Fees, on the other hand, are a different kettle of fish entirely:

70% of equity funds realized increases in total expense ratios from their most-recent annual report to their most recent semiannual report. Of those funds with increases, the average increase was +8.2 bps, while for the funds with expense decreases the average decrease was only -2.4 bps.

There’s even a helpful chart:


The reason for the fee hike becomes clear at the end: it’s being implemented in a desperate attempt to keep income from plunging along with the stock market.

Despite the increase in management fee ratios for many asset classes, the revenue derived from those fees has plummeted. We estimate that total revenue over the period examined by this report is down more than 40%…

The total dollar amount of fees collected by open-end funds appears to have declined by approximately 31% over the period examined by this report. This value is in spite of increases in realized expense ratios for many funds.

The lesson here is simple: Stop trying to beat the market, and move to index funds or ETFs instead. (Index funds weren’t included in the Lipper survey.) Mutual funds are moving away from being a mass-market product, and becoming more of a niche product aimed at elderly investors who don’t know any better and who don’t worry much about total expense ratios. The smart money’s moving out of mutual funds, to the extent that it was ever invested in those funds in the first place, and the dumb money that’s left over is largely price-insensitive. Expect these fees to continue to rise for years to come.


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A lot of smart, small money was in mutual funds from one to two generations ago. They were a great invention at the time.

Dumb money and everyone stuck in a 401k…

Posted by Dayl24 | Report as abusive

Everyone stuck in a 401(k) plan with a limited set of options. All of the choices in my plan are clunkers …

Posted by bitterrenter | Report as abusive

FERS (Federal Employee Retirement System) is a model to emulate. It is basically a 401K and your options include no mutual funds, only index funds with expenses of *just several basis points per year*. Nobody comes within a country mile. No Wall Street firm will ever offer an index fund that comes close.

The best financial advice I know of is to learn as much as you can and do as little business with wall street as possible. They do not have your interests at heart.

Posted by Dan | Report as abusive

Investment News’ David Hoffman wrote today about the Lipper report and found that: “Fee increases — fueled by fixed-service costs such as legal, audit, custodial, record keeping, taxes and accounting — were spread over a smaller asset base…And break points that lower costs as fund assets increase work in reverse as assets decrease, Mr. Kreider said… Lipper agrees that total expense ratios rose not because of an increase in management fees, but because of a decline in assets, Mr. Kreider said. [Jonathan Kreider is a fund research analyst at Lipper.]”

ICI studies mutual fund fees regularly. Our April 2009 study, Trends in the Fees and Expenses of Mutual Funds, 2008, found here:, indicated that expense ratios might go up, based on historical trends that found during the market downturn that lasted from early 2000 to early 2003, average expense ratio of stock funds rose several basis points. It’s important to note that in the past, as stock markets recover, any rise in fund expense ratios has tended to be reversed. In fact, the long term trend has been declining for mutual fund expense ratios during the past 20 years: Mutual fund fees and expenses fell to their lowest levels in more than a quarter century in 2008.

Why might declining assets lead to rising expense ratios?

• Some fund expenses are relatively fixed. Among other things, these include transfer agency fees (which tend to be charged as a fixed number of dollars per account), the cost of mailing fund literature, accounting and audit fees, and director fees. When fund assets fall, these fixed costs will rise as a percentage of assets, tending to boost a fund’s expense ratio.

• Some fund complexes offer “breakpoints” in the management fee that they charge their funds. Such a fee
structure reduces the fee rate as the fund’s assets grow, sharing with investors the benefits of economies of
scale. As asset levels fall, the fund may lose some of the benefit of those reduced rates, resulting in a higher
expense ratio.

Any potential increases in expense ratios as the result of these factors should be distinguished from increases in the contracted schedule of fund management fees. Any change in the contracted fee schedule would have to be approved by fund directors and shareholders.

Thanks for the opportunity to comment – Ianthe Zabel, ICI media relations (

I’m curious as to what qualifies someone to blog on financial advice these days. From your picture, you strike me as someone with enough market experience to have been in school during the previous bear market. The power of the mouse these days is hilarious. You sure do seem qualified to dissect a $4.5 Trillion industry. Maybe next week you can type one out on all of your worldy investment experience.

Posted by Weiss N. Vestor | Report as abusive