Institutional and individual investors today are paying substantially lower investment management fees than when Morningstar opened its doors more than 30 years ago. Why? More investment options, greater access to information, and demand for transparency from asset owners, regulators, media and firms like ours. The dramatic rise of lower-cost passive investments — including exchange-traded funds and passive open-end mutual funds — which now capture more than a third of the U.S. market, is evidence of this trend.
With the advent of the Department of Labor's fiduciary rule — which says financial advisers must make recommendations in the best interests of their clients to address conflicts of interest in retirement advice — investment expenses should continue to decline.
One cost, however, that's moving in the opposite direction, is the fee charged for benchmarking investments and related licensing costs paid by asset managers, custodians, wealth managers and software platforms, and to a lesser extent consultants and asset owners. Ultimately, these fees get passed on to individuals down the line.
The ability to measure and compare relative investment performance is extremely important. But only a handful of index providers control the vast majority of the market, and those providers are using their power to dramatically increase fees. In fact, 73% of U.S. mutual fund assets are benchmarked against one of just three index providers, according to the Financial Times. Each brand-name provider has indexes that have become synonymous with a particular asset class — U.S. large-capitalization stocks, global equities and emerging markets are good examples.
Many investment managers tell us that fees they pay for benchmark data have doubled or tripled in the past five years, with little justification for the increase. I've heard several anecdotes that benchmarking data is one of their top-five data expenses. We're concerned that the market relies on a small number of index providers charging top dollar for this critical information.