Opalesque Industry Update - Today shareholders have access to mutual fund expense information via point of sale documents,
prospectuses, fund company websites and external data providers. While these sources allow
fund shareholders to determine the total expense ratio (TER), deconstructing that ratio to fees
collected by distributors, administrators and custodians, and what is retained by fund
management is not possible through current disclosure.|
...Data made available to Strategic
Insight in the EFAMA membersí survey provides valuable information about the various
components of investment management fees and the total expense ratios.
Seventeen EFAMA corporate members, accounting for over EUR 1 trillion in EU-domiciled
equity and bond funds as of year-end 2010, were surveyed for this report. Key findings:
The full report can be downloaded here: Source
- In Europe, a retail equity fund shareholder pays about 175 basis points in average total
annual expenses (reflected by the TER) and a retail bond fund shareholder pays about
117 basis points annually.
- TER allocations: fund managers retain 42% of TER. Through retrocessions, distributors
are paid 41% of the total expense ratio. The balance of 17% is used for operating services
such as custody, administration, transfer agency, etc.
- Management Fee allocations: Within the bank and insurance distribution channels, stock
and bond fund managers retain on average 47% and 45% of annual management charges
(AMC) as net investment management fees, respectively. A greater proportion, 53% and
55% respectively, is paid to distributors through retrocessions. Among survey
participants, the bank and insurance distribution channels account for nearly 75% of
- After fee retrocession to distributors, net investment management fees retained by
European mutual fund managers average roughly 74 basis points (asset-weighted) among
retail actively managed equity funds and 49 basis points among bond funds.
- Asset-weighted average net investment management fees in Europe are only about 3
basis points greater than management fees in the U.S. when excluding the three largest
U.S. fund managers (managing $600 million to $1 trillion each). The influence of these
mega firms distorts the composite asset-weighted results often used to compare smaller
firms. Additionally, one of the managers applies an at-cost pricing model in setting fees
for its fund line-up. Even when including these mega sized managers, management fees
in the U.S. are approximately just 11 basis points less than net management fees in
- Over 50% of U.S. fund sales through Financial Advisors (FAs) were enabled by assetbased
fees of 1.0-1.5% charged in addition to the fundsí TER. This is important to note
when comparing European fundsí TERs to U.S. TERs and total shareholder costs.
- As the European fund industry expands and matures, operational efficiencies should
enable the reduction of fund expenses. Such evolution could be helped through greater
clarity and transparency of retained net investment management fees versus
distribution/advisory charges. In particular, UCITS IV promises to facilitate scale
efficiencies through cross-border mergers and master-feeder structures, although key tax
barriers are yet to be addressed. Meanwhile the UKís Retail Distribution Review (RDR),
ban on commissions, and shift towards advisor charging models are prompting the
creation of new lower fee funds. The RDR echoes a worldwide trend in regulatory thinking, seen in markets such as Australia, India, and the U.S., which is expected over
time to influence EC level initiatives and thus affect fee trends in Europe more broadly.