The individual investor in the United States has never had it easier, at least when it comes to the expenses incurred to get broad exposure to the global stock and bond markets. The common investor now pays fees which are a fraction of the cost paid a few decades ago, and every year fees fall further. The collapse in fees has transformed the business of asset management in the United States, leading to a decline in active management and persistent concentration of assets in fewer firms. These trends are fast spreading to Europe and developed Asia. Inevitably, they will soon reach markets like India and Brazil, where powerful incumbents are still able to charge their clients 2-4% of assets under management .
The evolution of the industry is well described in The Investment Company Institute’s Factbook (2019 ICI Factbook), a compendium of data on the investment industry in the United States.
The Shift from Active to Passive
The primary shift in the asset management industry has been from high-cost actively managed products to low-cost indexed products in the form of both mutual funds and ETFs (exchange traded funds). As shown in the chart below, about 1.5 trillion dollars in actively-managed funds have been replaced by indexed-products.
Persistent Reduction in Fees
The expense incurred by investors in funds have fallen every year, from nearly 1% of assets in 2000 to 0.55% in 2018. The average fee charged by funds has fallen from 1.60% to 1.26%, but assets are increasingly migrating to low-cost providers like Vanguard and Charles Schwab. The industry is rapidly consolidating in fewer players. Many active managers are closing funds after milking their client-base for as long as possible. The final destination of this process is likely to be a few very large low-cost providers and a limited amount of highly skilled active managers still able to charge fees above 1% of assets under management.
The data is further broken down in the chart below. The key data point to focus on is the asset-weighted cost of indexed mutual funds which was 0.08% in 2018. These funds are weighted heavily towards U.S. large capitalization stocks, a category which is seeing fees move to zero (made possible by stock-lending revenues received by the fund manager).
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