Fund firms are likely to face downward pressure on fees, as well as fewer mutual fund share classes, based on the Department of Labor’s (DOL) fiduciary rule, according to a recent story in Investment News.
DOL’s fiduciary rule was announced in April and centers on the retirement accounts of financial advisers’ clients, but some industry experts expect the rule to spread to the mutual fund industry and fees charged for products.
The rise of ultra-cheap ETFs has been a driver of fee compression for years so this topic is not new to the industry.
According to Morningstar’s most recent mutual fund flows report published in September, “Assets continued to exit active U.S.-equity funds, with an estimated $25.4 billion in outflows in August. Passive U.S.-equity funds persisted in attracting investor money, with an estimated inflow of $16.4 billion in August.”
Fees aren’t the only driver of fund flows. According to a recent research report published by Morningstar and recapped on SunStar’s blog, “investors really do respond to a wide spectrum of information about mutual funds when making their investment decisions. Data on past performance, investment recommendations, firm quality, management continuity, fund structure, style tilts, and fees all have meaningful impacts on investor behavior."
Key Takeaways
- Low fees matter more in the u.s. than globally
- Indexing drives flows into equities but not into fixed income
- Funds of funds drive inflows in the united states
- Morningstar ratings strongly drive fund flows
- Socially responsible funds reap large inflows
- Funds with style tilts in certain markets get higher flows
- The effect of a manager change on flows cannot be ignored
- Structural patterns exist between flows, aum, and fund age
- Firm size matters in the cross-border region.
- Investors seek out funds from higher-quality firms
- The consistency of preferences globally for fund-specific factors is remarkable
This is an opportunity for actively-managed funds to communicate candidly about fees and the true costs of operating funds. Transparency is an important aspect of this communication.
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