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3 Trends Toward Lower-Fee Investments

Michael Rawson, CFA

Michael Rawson: The landscape for fund distribution is changing. Individual investors often use financial advisors, so traditionally we'd see a lot of assets in load-based A share classes.

Recently, there have been three trends which have led to a change in the way funds are distributed which have changed the accumulation of assets in the different types of mutual fund share classes.

The first trend that we've observed is the rising use of defined-contribution plans. These are your retirement plans, such as 401(k)s and individual retirement accounts. In these types of accounts, we tend to see a more wide distribution of institutional share classes which tend to be sold at a lower expense ratio and don't have the load attached to the share class where the financial advisor would have a commission.

The second trend that we observe is the increasing adoption of exchange-traded finds. Not only do individual investors use exchange-traded funds, but financial advisors use exchange-traded funds, as well. Often you find registered investment advisors, who have a fiduciary responsibility to find the best investments for their clients, will choose exchange-traded funds because they have low expense ratios.

The third trend that we've observed is the winding use of omnibus accounts. Omnibus accounts allow an independent financial advisor or a broker to aggregate the investments of individuals into an institutional share class. So, whereas in the past an individual may have been forced to buy an A share class at a higher expense ratio, by going to a broker or a financial advisor who is aggregating all their accounts, they're able to pool their money and get access to an institutional share class.

So, with those three trends, we've seen an increasing adoption of institutional share classes and exchange-traded funds and fewer assets accumulating to load-based A share classes.

In general, the trend toward lower-fee investment products is good for investors; they are getting access to institutional share classes, omnibus accounts, and exchange-traded funds at lower expense ratios and without the load-based commission that they previously would have to pay for an A share class.