The cost of investing in mutual funds, as collective investing is known in the US, is at its lowest level in more than 25 years, according to ICI, the national association of the US Investment Company Institute.
Unlike their South African counterparts, US investors consider fees to be an important part of total returns and the study clearly shows that investors are paying attention to them.
The latest data shows investors are benefiting from fierce competition among fund providers, with many funds cutting fees. Investors are also migrating towards low-cost funds.
Most of the investors' assets are in low-cost funds. Of the total assets held in equity funds, 90 percent are in funds with below average total expense ratios, a well-known method of measuring fund costs.
Equity fund investors pay an average of about 113 basis points on their investments in the US.
Average equity and bond fund costs have fallen by nearly 50 percent over the past quarter of a century.
The average fees and expenses of money market funds have declined by about 25 percent since 1980.
Although South Africa has not yet conducted such a study on fees, some trends are visible. The average consumer is much less aware of the fees and expenses on their investments, although the focus on retirement costs by the government and media is slowly changing behavior.
Interestingly, the cost of investing in unit trusts or exchange-traded funds has fallen in recent years in South Africa, but the client is likely not to benefit, as the fund is always wrapped in another product structure where additional costs are incurred.
One example is the recent trend by many collective investment companies to reduce origination fees. This is a result of increased competition, much like the US market.
Investors can now access a quality portfolio of shares on the stock exchange for as little as R5,000, without charging even a cent upfront fee.
Annual or ongoing fees increased on average about eight years ago, when unit trust fees were deregulated for new funds introduced after 1998.
Although they have since plateaued, most actively managed equity funds charge between 1.25 percent to 1.5 percent per year, while bond and money market funds charge an average of 0.5 percent.
The introduction of passively managed unit trusts as well as exchange-traded funds means that for cost-conscious investors, things have improved significantly.
These funds charge an average of no more than 0.5 percent per year to provide the legal framework, compliance management, administration and client support – a good deal if any.
Interestingly, customers don't really care about it yet. Most still pay significantly more, either for additional functionality, i.e. the ability to swap between funds from different companies; For the right to receive a tax-efficient cover such as a retirement annuity or endowment; Or simply for the right to seek advice from your advisors.
Perhaps, if a standardized cost measurement of all product structures was introduced so that investors could compare fees and expenses across these different offerings, one might see more interest in purchasing cost-efficient long-term product solutions such as collective investments.
Perhaps, if clients are put in a position to understand that the fees charged for services come from the bottom line of their investment and therefore their total returns, they may be more interested in asking more questions before making a new investment.
This way, we will be happier when investors' policies mature or when they decide to sell their investments after being in the market for a few years.
* Di Turpin is chief executive of the Association of Collective Investments