Asset-weighted fees charged by equity fund managers decreased by 16 bps to 1.27%. For bond funds, the drop was even larger in percentage terms, as fees dropped by 15 bps to 0.74%. Multi-asset funds, however, extended their lead as the most expensive fund category: fees fell by just 9 bps to 1.47%. Due to a rise in assets under management, the fund industry’s total annual income from ongoing charges nevertheless rose by a further €8bn to €61bn, Morningstar estimates.
The passive influence
A likely reason for the relatively resilience of multi-asset fund fees is that the category is less affected by the rise of passive funds. This is considered by Morningstar as one of the main factors driving the decline in fees. Assets invested in passive equity funds rose from 8% of the total in 2013 to 10.3% in 2016, and many active fees cut their fees to keep up competition.
Kickback-free
Another factor is the introduction of clean, commission-free share classes which was driven by the ban on kickbacks introduced in the UK and the Netherlands over the period. According to Morningstar, clean share classes are on average 46 bps cheaper. These 46 basis points amount to the fee paid for advice, prompting Morningstar to suggest investors should only pay for advice separately if that costs them less than 0.46% of their total assets. “Otherwise they should choose a class that includes a distribution fee,” according to the investment research company’s free-of-charge advice.
Average fees charged by funds domiciled in the UK and the Netherlands indeed dropped the most, with Dutch funds leading the way: equity fund fees decreased a whopping 58 bps from 1.29% to 0.71% and bond fund fees have fallen 27 bps to 0.57%. This was helped by a massive increase in passively managed assets, from 1% in 2013 to 25.8% in 2016.
This stands in sharp contrast with what happened in many other countries: asset-weighted fund fees in Austria stayed the same, and fees in Denmark, Germany, Spain and Italy even went up (though this was due to increasing popularity of multi-asset funds in the latter three).
Europe’s most expensive country, Switzerland, rather ironically has the lowest asset-weighted expense ratio of 0.62%, joint with Ireland. An important reason for this however, is that passive funds have a market share of 50% in Switzerland, twice Ireland’s share.
