By JLP | April 17, 2009
Check this out. I found this on page 161 of Christopher Jones’ book, The Intelligent Portfolio*, regarding mutual fund fees. I never really looked at fees in this way.
The aggregate numbers on the magnitude of investment fees are sustantial. For example, look at the fees charged by mutual fund companies. According to the Investment Company Institute (an industry trade group for the mutual fund industry), mutual fund assets totaled $10.4 trillion at the end of 2006 (yes, that is trillion with a “t”)**. Equity mutual funds alone held $6.6 trillion in assets. The average fee for these equity funds was 1.07 percent per year on an asset-weighted basis. This implies that investors paid over $70.6 billion in management expenses and load fees alone in 2006. In addition, there was over $1.5 tillion invested in bond mutual funds, generating an estimated $12.4 billion per year in fees. Money market fund accounted for another $2.4 trillion in assets and generated an estimated $9.6 billion in fees for hte fund industry. Adding it all up you get to a grand total of $92 billion in annual mutual fund fees—a lot of money by anyone’s standards. Putting these fees into perspective, $92 billion is equivalent to an average payment of about $300 per year for every man, woman, and child in the United States. And this estimate does not even include the many trillions of dollars managed by institutional investment managers outside of the mutual fund industry, nor the costs associated with brokerage commissions, transactions fees, custody fees, account fees, and other advisory fees. needless to say, the investment management industry is a very big and lucrative business.
That paragraph was written using 2006 data. I did a little research and found that according to the latest report, the average equity mutual fund has a fee of .99 percent. I also noticed that the 2006 numbers were adjusted downward by one basis point to 1.06 percent. According to that same report, it’s not likely that fees will continue to drop:
Recent press reports have suggested that fund expense ratios could begin to rise owing to the market downturn that began in the fall of 2007 and the attendant decline in the assets of stock mutual funds. No such increase in fund expense ratios is evident in this paper, but experience from past market cycles indicates that a rising trend is possible. During the market downturn that lasted from early 2000 to early 2003, for example, average expense ratio of stock funds rose several basis points.
Why might declining assets lead to rising expense ratios? There are a number of reasons; two stand out:
• 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 benefi t of those reduced rates, resulting in a higher expense ratio.
It stinks that when account values are dropping, fund expenses tend to increase. But, I suppose the opposite is true when account values are increasing. The skeptic in me wonders if fees fall as quickly as they rise? Regardless, investment management is big business.
**Source: Research Fundamentals: Fees and Expenses of Mutual Funds, 2006 (PDF)