The American mutual fund, a triumph of financial innovation

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Phil Coggan of The Economist tells of a survey by Lipper (I can’t find it online) on mutual fund fees:

The average total expense ratios of US mutual funds are 1.32%, for German funds 1.57% and for UK funds 1.66%. Weight the ratios by asset size (to reflect where the bulk of investor money is held) and the difference is even more stark; 91 basis points (or 0.91%) in the US, 144 bp in Germany and 163bp in the UK.

Phil’s explanation:

[S]ome 48% of US investors buy mutual funds directly or via a discount broker, cutting distribution costs.

By contrast, 45% of all German mutual fund assets are distributed via a retail bank, with another 15% coming through an insurance broker; less than 1% of funds are bought directly or through a fund supermarket (discount broker). In Britain, 53% of funds are sold via an independent financial adviser (IFA); normally IFAs are remunerated via a trail fee (kickback) of 0.5% per annum.  Such costs are passed on to the client in the form of a higher annual management fee.

The discount brokerage and the direct distribution model for mutual funds were both pioneered in the U.S. in the 1970s (Chuck Schwab and Jack Bogle were the most important pioneers). These were, drumroll please, financial innovations—innovations spawned in an era of deregulation and upheaval. These innovations haven’t really made it across the Atlantic yet. As a result, investors in stodgier, less innovation-friendly Germany and the UK are paying higher fees for their mutual funds. And I just thought that was something that I, since I dump on financial innovation from time to time, ought to acknowledge.

That said, I still think the U.S. mutual fund industry is a disaster for many of its customers: Too many different funds, too high fees, too much encouragement of performance chasing, etc. But it’s apparently better than its British and German brethren.

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