Morningstar Magazine - June/July 2018 - 27

Dispatches

Global Briefs
TRENDS

Investors Paid Lower Fund Expenses in 2017 Than Ever Before
Our latest study of U.S. open-end mutual funds
and exchange-traded funds found the assetweighted average expense ratio across funds was
0.52% in 2017, down from 0.56% in 2016. That
8% decline is the largest year-over-year decline
we have recorded since we began tracking
the trend in asset-weighted average fees in 2000.
We estimate that investors saved roughly $4 billion
in fund expenses last year.

This decline was driven by $949 billion in flows into
funds with fees that rank within the bottom
20% of their category group. About 70% of these
flows were into passively managed funds,
with low-cost active funds accounting for the rest.

Among active U.S. equity funds, strong equitymarket performance more than offset outflows.
The launch of lower-cost share classes,
a multiyear trend, also helped drive lower fund
expenses for investors.

In addition, there was an uptick in active funds
reducing fees in 2017, thanks to scale
economies achieved through asset growth.

Patty Oey is a senior manager research analyst with
Morningstar Research Services.

The Shift Into Low-Fee Funds Accelerates

Cheapest 20%

Remaining 80%
$1,200B
$949B

900
600
300
0
-$251B

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

-300
-600

2017

Source: Morningstar. Data as of 12/31/2017.

SEC Best-Interest
Cheapest 20%
Remaining 80%
Regulation
Could Be
Transformative
AMERICAS

United States
83
41
90
The degree of enforcement
by the U.S. Securities
70
147
and Exchange
will be a230
key factor
198
107 Commission153
109
in determining whether its newly proposed best92
63
interest rules package will be as (if not more)

transformative for the financial sector as the
Department of Labor's fiduciary rule has been. The
SEC's regulations are in a public comment period,
while the fiduciary rule is in stasis. While neither
rule is set in stone, it's nearly definitive that the
United States will have some form of best-interest
standard. We are maintaining our fair value
estimates and moat ratings for affected firms but
will update our views as regulations solidify. 37
52
180
66
402
110Interest overlaps
342
While the SEC's Regulation Best
279
246
240 a lot with the fiduciary rule, there
206major
are two
120
areas of difference. The first is that the SEC's rule
-19
will cover those providing recommendations
-126

to both taxable and retirement accounts, while
the fiduciary rule only covers retirement accounts.
Taxable account assets managed by financial
advisors are often two to four times greater$1,200B
than
their Individual Retirement Account assets.
The second is that the SEC will be 949
the enforcer 900
of its regulation, while enforcement of the
Department of Labor's fiduciary rule relies on class
600
44
593
action lawsuits
530 via the best-interest contract
exemption, or BICE.
435
398
300
While many in the financial-services sector would
applaud less exposure to class action lawsuits,
0
the enforcement
actions of the SEC could be
-66
-212

-251

global.morningstar.com/Morningstarmagazine
-414

-300
27

-600
http://global.morningstar.com/Morningstarmagazine
Table of Contents for the Digital Edition of Morningstar Magazine - June/July 2018
