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Investing in funds getting cheaper

Glenn Freeman  |  07 Nov 2017Text size  Decrease  Increase  |  
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On average, Australian managed funds receive a top rating in fees and expenses--a reflection of their low fees relative to global peers and our investor-friendly fee disclosure regime--according to Morningstar's 2017 Global Fund Investor Experience study.

It finds that there is "continued downward pressure on fees in many global markets".

"Taken together, bans on sales loads, continued decoupling of fund expenses from advice charges, bans on commissions, plus mandatory fee transparency, have resulted in a great many investors paying less for funds than ever before," according to the report.

 

Fees and expenses scorecard


chart


Grade change indicators: i Improved since last survey; s Declined since last survey; 5 No change since last survey.
Source: Morningstar, Inc.

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However, it found that although the costs of certain investment products are declining, and relatively cheap exchange-traded funds are proliferating, investors are in many cases still paying the same or higher costs to own a portfolio. This is because lower costs for investments are offset by higher advice costs--areas that are more difficult to assess on a large scale.

Regulators in different countries covered by the study are taking different approaches to tackling some of the same problems.

For example, Australia set a rules-based "best interest" standard when it banned commissions and other forms of conflict-of-interest payments in 2013.

These rules did not cover insurance policies at the time, but have become an area of focus for regulators in recent years, explains Anthony Serhan, Morningstar's managing director, research strategy, Asia Pacific.

"Most advisors in the world continue to be paid through commissions, and banks and insurance companies remain one of the primary channels of distribution," he says.

While some markets, such as Australia and the United Kingdom, have started to shift away from these remuneration models, Europe and Asia continue with commissions and asset-based fees. The United States has been trending away from commission-based products towards fee-for-service for well over a decade.

"We believe that change will inevitably come as regulations and trends take hold. This is true not only for advisers but also for the organisations that hold the licenses for advisers, product manufacturers and administration platforms," Serhan says.

Morningstar's view on soft-dollar commissions is simple: the fewer the better. Ideally, fund companies would not use soft-dollar arrangements at all. But if they do, they should be disclosed and used on research that directly benefits the fund. Morningstar does not approve of soft dollars being used to offset fund management expenses, to pay entertainment costs, or other expenses.

The increased disclosure requirements for fund managers and other parts of the financial services industry are also driving change in fees and charges. In Europe, the revised Markets in Financial Instruments Directive, known as MiFID II, is a prime example of this, set to take effect in January 2018.

"Often, one of the precursors to the banning of commissions and trailer fees is the requirement to disclose these costs on statements," Serhan says.

In Australia, Regulatory Guide 97 from the Australian Securities and Investments Commission, which is coming into effect, requires high levels of fee disclosure for both superannuation funds and managed investment schemes.

"Transaction and operational costs will become much more transparent under these new standards. The costs of trading, for example, will now need to be disclosed, as they are in other markets. We expect to see similar moves in other markets," Serhan says.

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Glenn Freeman is a senior editor at Morningstar.

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is senior editor for Morningstar Australia

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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