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...Data made available to Strategic Insight in the EFAMA members’ 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:

• 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 assets. 
• 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 Europe. 
• 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 funds’ TER. This is important to note when comparing European funds’ 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 UK’s 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.

- FG