What do American investors prefer - paying fee to advisors for financial advice or paying embedded loads or commissions? What proportion of investors pay fee for financial advice in US?
The US mutual fund market has undergone a transformation in the past few decades. It used to be that funds sold with front-end loads predominated. But today no-load share classes account for nearly two thirds of long-term fund assets in the US. Now, 90 percent of US mutual funds offer both a front-load share class or a no-load share class, leaving investors to choose what best suits their needs.
The direct competition between broker-sold funds and no-load funds has led to a number of changes, including a marked decline in load fees paid by US mutual fund investors. As of last year, US mutual fund investors typically paid less than 1 percent in loads or commissions.
Much of the shift in the use of no-load funds can be attributed to a change in how American investors choose to compensate financial advice. Our research indicates that 80 percent of households owning mutual fund shares outside employer-sponsored retirement plans own fund shares through investment professionals. For those using a broker or other financial professional, the trend in the US is to choose a no-load fund and compensate the adviser through an asset-based or hourly fee.
The penetration level of mutual funds among US households is one of the highest globally. What are the reasons for this?
ICI Global just conducted research on this issue. Typically, countries with large domestic fund industries are those with higher per capita income and deeper and more liquid stock markets. Defined contribution (DC) pension systems that allow for investment in funds are also a key factor in fostering larger fund industries. India has a deep and liquid stock market, which bodes well for its future. And as India’s per-capita income rises, its middle class grows, and its population ages, more people will save for retirement and other long-term financial goals. This also should spur domestic fund industry growth.
What has helped US mutual fund industry grow so rapidly, in spite of the recession?
American fund investors tend to have a long-term outlook and this is a great strength of our system. It comes from the fact that investors are using funds to save for retirement and other significant expenses, like buying a house or sending a child to college, that have a long time horizon. For this reason, even during the global financial crisis most savers using 401(k) plans (the most common DC plans) kept contributing to their retirement accounts. That decision has rebounded to their benefit: much of the growth in assets since 2009 can be attributed to continuing contributions to retirement accounts, a growing trend towards international equity exposure and the global recovery in equity prices.
The penetration of mutual funds among Indian households is still in single digit despite the fact that a vast majority of Indian equity funds outperform the markets. What suggestions would you make to increase their popularity?
Each country has its own circumstances but in the United States we are strong believers in the tremendous advantages that funds offer for long-term savings. Our system of defined contribution plans empowers individuals by helping them build savings over their working lives.
We like defined contribution retirement plans because they allow workers to own their own assets and control investment decisions. These plans are transparent. They also are portable and accrue value throughout a participant’s working life. Indian policy makers may wish to study and consider whether development and expansion of a DC pension system in India might benefit savers and the country’s capital markets.
Has the growth of robo advisers affected traditional advisers in US?
Online advice solutions, known as “robo advisers,” are yet another great innovation in the fund industry. They hold a lot of promise in terms of helping savers and creating new efficiencies. But my view—and that of many industry leaders—is that they are a means to an end, not the end. I’m still a strong believer in personal relationships with investors. And even those who are innovating around the use of online advice don’t believe it’s a complete replacement for the many other services they provide through other channels. Anything that serves and further informs the investor is a positive, but this latest development won’t supplant the many things the fund industry and its intermediaries do so well when interacting with investors.
How are American fund houses carrying out investor awareness programs? How do you measure the effectiveness of investor awareness activities? What needs to be done to make such programs robust?
Investor education and engagement are valuable and important because we all benefit when investors are educated and equipped to make sound decisions about their financial needs.
US mutual fund companies have a long, proud history of working to inform and teach investors through a variety of creative and research-based approaches. Many of these draw upon the Internet, social media, and other digital communications tools. There’s a lot of innovation afoot. And so it’s no accident that surveys show eight in ten US fund investors feel confident that saving through funds will help them meet their savings goals. Education and engagement make a difference.
We believe in a few fundamentals. First, investor education cannot fully replace financial advice in supporting most investors in making sound decisions. Financial advisors play an important role. Second, investor education should strive to equip potential investors to make choices that best fit their needs and circumstances, but not to drive them to particular products. One size doesn’t fit all.
Ultimately, investor education programs that successfully encourage average savers to build more long-term wealth for themselves and their families through the use of funds are setting up a brighter future for those individuals and the country in which they live.
Investment Company Institute is an association of US mutual fund companies.
