Fee-Only Advisors Driving a Rush Into Cheap Funds: Morningstar

Investors saved about $9.8 billion in fees for open-end mutual funds and exchange-traded funds last year as expense ratios edged down, continuing a long-term trend, according to Morningstar.

The research firm noted the role played by investors flocking to lower-cost funds, especially ETFs, and shifting to fee-only advisors.

U.S. funds’ asset-weighted average expense ratio fell to 0.37% in 2022 from 0.40% in 2021, Morningstar reported in its 2022 U.S. Fund Fee Study this week. The average expense ratio has been falling for over two decades, from 0.91% in 2002, according to the firm.

“We saw substantial assets wiped from expensive funds in 2022 as investors poured their money into lower-cost funds to minimize investment costs,” Bryan Armour, Morningstar’s director of passive strategies research, said in a release.

“Asset managers have responded to this trend by cutting fees to vie for market share, and the end result is a win for investors,” he said.

In 2022, the gap between investor cash flowing into cheap versus expensive funds “grew into a chasm,” Morningstar said. For the first time in five years, the cheapest quintile of funds drew over $1.1 trillion more than the remaining 80% of funds; the cheapest 20% brought in $394 billion net while the remaining 80% of funds shed $734 billion, the firm reported.

The average expense ratio for active funds fell to 0.59% in 2022 from 0.61% the previous year, mostly due to large net outflows from expensive funds and share classes, according to Morningstar. The average for passive funds slid to 0.12% in 2022 from 0.13% a year earlier.

Vanguard continues to claim the lowest asset-weighted average expense ratio among asset managers — 0.08% last year, compared with 0.10% in 2017 — even though some competitors are gaining ground, Morningstar reported.

Vanguard was followed by State Street Global Advisors (0.15%), iShares (0.17%) and Dimensional Fund Advisors (0.24%), Morningstar reported, adding that investors have benefited from the firms’ jockeying for position, which offers an ever-wider menu of ever-cheaper options with broad market exposure.

“Investors are increasingly aware of the importance of minimizing investment costs, which has led them to favor lower-cost funds,” Morningstar’s report said.

Evolution in financial-advice economics has played a central role, the firm said.

“The move toward fee-based models of charging for financial advice has been a key driver of the shift toward lower-cost funds, share classes and fund types — most notably exchange-traded funds. Investors employing a fee-based advisor may not be pocketing the difference from lower fund fees but redirecting those dollars to cover the price of advice.”

Credit: Shutterstock