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Tuesday, January 09, 2018

Not Every Fund's Fee Can Be Below Average

News summary by MFWire's editors

Fundsters, there's a not-so-secret truth that investors, advisors, and especially commentators may need to be reminded of: no matter how much funds cost, it is not possible for them all to have below average costs. Mutual funds do not come from a bizarro Lake Wobegon.

Although this point is obvious, it often seems like it is lost on some of those watching the industry. Over the weekend Barron's wrote about "The Great Fund Fee Divide" and pondered "Which Firms Have the Priciest Mutual Funds?" The first article discusses broad categories and share classes, while the second highlights specific firms' funds that have expenses higher than their categories.

Price comparisons are powerful in investing, as they are in so much else. Yet is it really a terrible thing that, as Barron's points out, 8 percent of the industry's assets "remains in the two priciest quintiles of annual fees, according to Morningstar Direct"? That means that the cheapest 60 percent of all mutual funds hold 92 percent of assets; as Barron's points out, "when given the option, investors have flocked to lower-cost funds." With non-financial services and products, cheaper options tend to dominate, and expensive options are much less widely adopted. You don't see many Maseratis on the road or lots of caviar eaten at your local lunch spot, yet there's little widespread concern about how high the prices are compared to other cars or other foods.

There's another key fees point that can get lost in all this low-cost focus: mutual fund fees aren't the only fees that an investor pays. Investors buying no-load mutual funds from supermarkets like Fidelity, Schwab, or TD will normally pay a ticket charge whenever they buy or sell the fund's shares, a ticket charge that's outside of the expense ratio, though there are some no-load NTF exceptions now. ETF investors, except when using a special commission-free ETF platform with a limited selection of funds, also pay ticket charges when they buy and sell, in addition to the added potential cost of the bid-ask spread on the fund's current NAV. Then the investor has to pay their financial advisor (unless they used a front-end load, high fee fund that already paid the FA).

Again, that's not to say that those other fees aren't worth paying or that investors shouldn't care about mutual fund fees, but only that investors shouldn't look at fund fees in a vacuum. Investors have already been voting with their feet by mostly shifting to lower cost funds. It's time to bring more nuance to the fee discussion. As the Fiduciary Benchmarks folks regularly remind 401(k) industry insiders, it's not about fees alone, it's about fees and value together. 

Edited by: Neil Anderson, Managing Editor

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