Two new papers on fees and investor behavior— one by Morningstar and NORC at the University of Chicago and the other by the Financial Conduct Authority of the United Kingdom—can help us understand how investors respond to investment fees. In both reports, the authors find that individual investors partially ignore the fees they are paying, with potentially serious consequences. By changing the way in which investments are presented and chosen, however, investors would be more likely to take fees into account. Let’s take a quick look at the findings from each paper and examine what they mean, especially in light of our research that finds that the average asset-weighted fees paid by investors in the United States are declining.
Now You See It (and Apparently, Now They Don’t)
In April, the FCA released a paper by Lucy Hayes, William Lee, and Anish Thakrar titled “Now You See It: Drawing Attention to Charges in the Asset Management Industry.” The paper presents an online experiment with 1,000 unadvised individual investors in the U.K. The participants used a simulated investment platform to select among actively managed U.K. equity funds. The researchers selected pairs of funds that were broadly the same, except for cost. The researchers then studied how much the participants invested in the higher-cost funds versus the lower-cost ones, depending on how the fees were presented.