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Rekenthaler Report

Brave New World

Mutual funds shed their commissions.


What's to Come
Saturday's The Wall Street Journal carried an article by Jason Zweig that wondered if mutual fund "fee hurdles could come down everywhere?" Zweig noted the United Kingdom has already banned sales charges from being attached to the price of a mutual fund, Australia is in the midst of implementing such a regulation, and the Netherlands will do so on the New Year. Effectively, those countries only permit pure no-load funds--that is, funds that lack both a front-end charge and an ongoing trail fee. (Those are called 12b-1 fees in the United States, although they are not called that elsewhere.) Zweig believes this could be "one possible future" for the U.S.

I would reword to probable. In addition to the three countries that Zweig mentioned, India has also banned front-end commissions (but not yet trail fees), and Germany and Sweden have the issue up for review. And the big dog is walking. The U.S. owns half of global mutual fund assets, and although American regulators have not touched the subject (the SEC briefly put 12b-1 fees up for review but backed down under fierce pressure), the marketplace has. As I reported in late May, today's net cash inflows into U.S. mutual funds are almost entirely into no-commission share classes, namely institutional funds, exchange-traded funds, and load-waived A shares. Commission funds are starving on the vine.

John Rekenthaler does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.