Price wars have hit a variety of industries recently, including airlines and wireless phone providers. Will mutual funds be next?
A few signs of funds discounting have appeared. In April, American Funds slashed expense ratios 10 percent. Earlier, Fidelity cut some costs and began running ads for index funds with expense ratios of 10 basis points. Further, New York Attorney General Eliot Spitzer has pressured Putnam and AllianceBernstein to make cuts.
Still, discounting is not yet widespread. “Many companies have decided not to worry about cutting expenses,” says Russel Kinnel, director of Morningstar's mutual fund analysis. “Instead, they have focused on marketing and doing whatever they could to endear themselves to brokers.”
But fund insiders say the lack of lower fees are a function of increased compliance costs. Fund companies have spent heavily, for instance, on hiring chief compliance officers and on monitoring systems. “Cutting expense ratios by 20 basis points will not necessarily solve the major problems that investors face,” says Avi Nachmany, research director of Strategic Insights, a fund consultant in New York.
In the end, market forces could be what drives down costs. According to the Investment Company Institute, the industry trade group, total investment costs — including sales commission and expense ratios — have been declining gradually for the past two decades. The drops started as investors rebelled against 8.5 percent front-end loads by shifting to no-loads or share classes with smaller upfront charges. In the last few years, “the vast majority of investments have gone to funds with relatively low overall expense ratios,” says Jeff Keil, vice president of Global Fiduciary Review for Lipper. “So more investors are beginning to pay less.”