This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Why Fund Costs Are Falling

NEW YORK (TheStreet) -- Fund investors have been dumping expensive mutual funds and gravitating toward low-cost choices.

According to a recent study by the Investment Company Institute, expense ratios for the average investor in equity funds dropped from 1.0% in 2003 to 0.79% last year.

Part of the decline can be attributed to the fact that shareholders have become savvier about shopping for bargains.

But much of the change is due to an upheaval in the operations of financial advisers. Because of a big change in how they are compensated, more advisers have been steering clients toward the cheapest funds.

In the past, advisers -- who account for half of all mutual fund sales -- often made more money by selling expensive funds.

Where the Next Boom Is Coming From >>

In a typical transaction, the shareholder would pay a load, or sales commission, of 5%. When a client invested $10,000 into a fund, $500 of the total went to the adviser.

In some cases, the advisers got additional fees and incentives for selling the load funds. Many load funds had steep annual expense ratios, but that didn't discourage advisers from recommending the investments.

Advisers had big incentives to collect the up-front commissions, and less reason to worry about the costs that clients faced.

Then in recent years, the compensation system for many advisers changed.

Instead of collecting a sales commission every time a client buys a fund, advisers take flat annual fees that are typically 1% of the assets in an account.

Many advisers now recommend no-load funds, which do not charge commissions. In this new world, an adviser automatically gets paid more as a client's assets increase.

That gives the adviser a clear incentive to make the client wealthier.

To appreciate why assets have been pouring into cheap funds, consider an adviser who is comparing two similar funds for a client.

10 Forces Conspiring Against Your Savings >>

One fund charges an annual expense ratio of 1.5%, while the other charges 0.5%. If the adviser recommends the more expensive fund, he knows that the client will pay 1 percentage point more in fees, which will disappear into the pockets of the fund company.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $110.38 0.00%
FB $92.07 0.00%
GOOG $626.91 0.00%
TSLA $247.57 0.00%
YHOO $30.71 0.00%


Chart of I:DJI
DOW 16,472.37 +200.36 1.23%
S&P 500 1,951.36 +27.54 1.43%
NASDAQ 4,707.7750 +80.6910 1.74%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs