Morningstar released the fees and expenses section of its biannual Global Investor Experience (GIE) report, which rates the “experiences” of mutual fund investors in 26 markets across North America, Europe, Asia, and Africa.
“Outside of the United Kingdom, the U.S., Australia, and the Netherlands, it is rare for investors to pay for financial advice directly.”
Using a grading scale of Top, Above Average, Average, Below Average, and Bottom to assign a grade to each market, Morningstar gave Top grades to Australia, the Netherlands, and the United States as the most investor-friendly markets in terms of fees and expenses.
Conversely, Morningstar assigned Bottom grades to Italy and Taiwan indicating these fund markets have amongst the highest fees and expenses.
“The good news for global fund investors is that in many markets, fees are falling, driven by a combination of asset flows to cheaper funds and the repricing of existing investments,” said Grant Kennaway, head of manager selection at Morningstar and a co-author of the study. “The increased prevalence of unbundled fund fees enables transparency and empowers investor success. However, the global fund industry structure perpetuates the use of upfront fees and the high prevalence of embedded ongoing commissions across 18 European and Asian markets can lead to a lack of clarity for investors.”
Kennaway and the team found that the majority of the 26 markets studied saw the asset-weighted median expense ratios for domestic and available-for-sale funds fall since the 2019 study.
Lower asset-weighted median fees are driven by a combination of asset flows to cheaper funds as well as the repricing of existing investments. In markets where retail investors have access to multiple sales channels, investors are increasingly aware of the importance of minimizing investment costs, which has led them to favor lower-cost fund share classes.
Morningstar noted that outside of the United Kingdom, the U.S., Australia, and the Netherlands, it is rare for investors to pay for financial advice directly. A lack of regulation towards limiting loads and trail commissions can cause many investors to unavoidably pay for advice they do not seek or receive.
Even in markets where share classes without trail commissions are for sale, such as Italy, they are not easily accessible for the average retail investor, given that fund distribution is dominated by intermediaries, notably banks.
Passive moves
The move toward fee-based financial advice in the U.S. and Australia has spurred demand for lower-cost funds like passives. Institutions and advisers have increasingly opted against costlier share classes that embed advice and distribution fees. The trend extends to markets such as India and Canada.
Australia, the Netherlands, and the U.S. earned top grades due to their typically unbundled fund fees. This is the fourth study in a row that these three countries have received the highest grade in this area.
In markets where banks dominate fund distribution, there is no sign that market forces alone will drive down asset-weighted median expense ratios for retail investors. This is particularly evident in markets like Italy, Taiwan, Hong Kong, and Singapore where expensive offshore fund sales predominate over those of cheaper locally domiciled funds.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
