Advisory Fee Breakpoints

Abstract

Over the last several years, the level of fees charged by investment advisers to mutual fund clients and the adequacy of investment advisory contract reviews by mutual fund boards have been subject to a high degree of scrutiny. Critics have charged that advisory fees paid by mutual funds should be comparable to those paid by pension plans and other institutional clients, but, in practice, fees charged to mutual funds are often higher. In light of this increasing scrutiny, lawsuits, and recent SEC actions, mutual fund boards have been under pressure to negotiate reductions in advisory fees, and many fund boards have increasingly turned to advisory fee breakpoints, in addition to flat-fee cuts and fee waivers, to reduce advisory fees charged to fund shareholders. While advisory fee breakpoints are beneficial to mutual fund shareholders, empirical data discussed in this article demonstrate that fund boards have taken varied approaches in establishing them. The authors study this behavior through an examination of four Lipper fund categories—equity, fixed income, balanced, and international—between July 2004 and February 2005, a period of intense breakpoints adoption. The survey yields significant findings which include the rapid growth of advisory breakpoints among all fund types and fund families surveyed, an increase in the number of breakpoints in larger funds, the trend toward funds with breakpoints exhibiting higher current fees than non-breakpoint funds, and fee reductions triggered at significantly higher levels than present fund AUM for funds which introduced new breakpoints.

TOPICS: Mutual funds/passive investing/indexing, legal/regulatory/public policy, manager selection