Fund Ownership Costs Wane

February 18, 2004 ( - Despite high-profile reports to the contrary in the recent months, one industry group is saying the average cost to own mutual fund shares has gone down over the past few years.

The Investment Company Institute (ICI) says the misconception about mutual fund fee is due in part to how industry analysts have overlooked certain key aspects to mutual fund cost.   These factors include structural changes in mutual funds over the past two decades – such as some shareholders paying additional charges for financial advisor advice and service – the 20-fold increase in the number of people holding mutual funds since 1980 and the proliferation of funds, and thus, many smaller funds that are unable to maintain the same “savings from scale economies that older, larger funds have experienced.”

As evidence of its contention, ICI points to an examination of the numbers though shows the average costs of ownership have continued to decline since 1980.   The average cost – an aggregate that includes a sales-weighted average of the expense ratio and the annuitized loads paid by shareholders – has gone down over a two-year period from 2000 to 2002 across all categories of mutual funds.   Equity funds reported an average cost of 1.25% in 2002, down from 1.35% in 2000, bond funds were at 0.88% in 2002, lower than 2000’s 0.90% and money market funds stood at 0.34%, lower than 0.42% in 2000.    Looking back over a 20-year period, the average cost in 1980 for equity funds was 2.26%, bond funds 1.53% and money market funds 0.55%.  

Adding a financial advisor to the fray though skews the average cost numbers up, ICI found.   Since financial advisors provide untold number of extra services to their clients investing in mutual funds, these investors are often dinged with extra charges in the form of sales loads and annual 12b-1 fees, even though ICI does not include “loads” to this expense ratio equation, since they are “a one-time charge.”  

The main culprits of higher fees among funds though, according to ICI, are 12b-1 fees included in the expense ratio.   ICI found approximately one-third of the variation in equity fund expense ratios and three-quarters of the variation in bond fund expense ratios are due to 12b-1 fees.    This in turn can be significant, since ICI found that two-thirds of equity and bond mutual funds, sold outside of an employer’s retirement account, carry a sales load with them, a class that represents any fund charging a 12b-1 fee greater than 25 basis points.