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Portfolio > Mutual Funds

Institutional Funds Enable Active Managers to Cut Fees

By Michael S. Fischer

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Institutionally priced funds amassed $612 billion of net new fund flows in 2017, an increase of 15% over the previous year, Broadridge Financial Solutions reported Thursday.

Broadridge’s data showed that half of actively managed institutional funds assets came from retail channels: registered investment advisors, broker-dealers and online.

The other half was from institutional channels: banks, private banks and trusts.

Private banks were the largest channel for institutional funds, with $880 billion.

According to the data, the amount of retail assets invested in institutional funds has steadily increased over the past five years, from less than 37% at the end of 2012. 

Broadridge said that the infusion of retail assets into institutional funds has been especially pronounced for RIAs, which held $852 billion in institutional funds at the end of last year. RIAs are also the largest channel for ETFs, with more than $923 billion. 

The combination of institutionally priced actively managed funds, ETFs and index funds has made the RIA channel the prime target for asset managers, according to Broadridge. Overall fund and ETF assets amounted to $2.8 trillion at the end of 2017. 

“Active managers pushed back on index funds and ETFs in 2017 by cutting fees for actively managed funds, and introducing institutional shares for existing funds,” Frank Polefrone, senior vice president of Broadridge’s data and analytics business, said in a statement.

“The increase in fee-based advisors across all retail channels, as well as the changing product demand by broker-dealers, has created an environment where the only asset gains for actively managed funds in 2017 were from institutionally priced products.”

Broadridge tracks some $12 trillion of ETF and fund assets across third-party retail and institutional channels, and nearly a third of those assets is now allocated to institutionally priced funds. 

It said that during the past year, load funds had negative net flows of $380 billion.

Net new assets into all long-term mutual funds sold through third-party channels increased by $385 billion, or 5%, from 2016.

Over the last five years, assets in institutional funds have grown by 8.3% annually, which compared with 4.5% annual growth in direct-sold (no-load) funds and just 0.8% in retail load funds.

“While cutting fees gets a lot of attention, the dramatic flow of assets into institutionally priced funds has had an even more pronounced impact for shareholders,” Jeff Tjornehoj, Broadridge’s director of fiduciary and fund research, said in the statement.

“For perspective, the weighted average expense ratio — roughly what most shareholders pay — of equity mutual funds is now in line with pricing for bond fund fees five years ago. That’s a sea change.”

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