Management fees: going down

Industry disruption starts, usually, when incumbents overcharge or offer substandard service. Institutional fund managers are often guilty of both: the majority of active fund managers underperform their benchmarks and charge handsomely for the privilege.

Exchange traded funds have muscled in on this poorly-defended turf. As well as offering lower fees, as little as one-third of those charged by active managers, ETFs are continuously priced, allowing more flexible trading intraday. According to the latest data from ETFGI, a consultancy, the number of ETFs and related products has reached 5,669, holding assets of $2.9tn. At the end of 2014, mutual funds managed $31tn, according to the Investment Company Institute. Lots more share to take, then, and ETFs are only becoming more popular. In the first quarter of this year, they received net inflows of $96bn, 2.5 times more than the same time last year. Last year mutual funds experienced the highest level of net outflows since 2007.

Active managers have tried to win back ground by launching actively managed ETFs. Products have been slow in coming but Eaton Vance and Capital Group have won US approval for their ETFs to offer live pricing without disclosing their full portfolio positions (active managers prefer to guard their intellectual property).

Offering more flexibility for even less is Motif, a four-year-old company backed by, among others, Goldman Sachs and JPMorgan. Motif offers ready made baskets of up to 30 stocks - "motifs" - to fit investment themes for a flat fee roughly equivalent to what many brokerages charge for a single trade. Motifs can be reweighted as desired or investors can build their own. Motif holders own the underlying stocks avoiding worries about poor liquidity that go with ETFs.

Technology will go on pushing the cost of owning shares towards zero. That is as it should be. Everyone who makes money selling or managing stocks should be worried.

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