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Investment product fees’ downward trend is not letting up as broad market-cap-weighted index strategy managers continue to drive expense ratios toward zero, according to research from Cerulli Associates.

To remain competitive, Cerulli says, advisors must expand their definition of advice to include nonfinancial aspects of the client’s life and offer a meaningful experiential process for their clients.

Cerulli reported that overall mutual fund and exchange-traded fund asset-weighted average total net expense ratios dropped from 62.3 basis points in 2014 to 46 basis points in 2018.

The report ascribed the most significant decline in fees to index products. During the past three years, index mutual fund asset-weighted average net expense ratios fell by 31.3%, while those of index ETFs were down 23.2%.

It said that within the past year, BlackRock (iShares), Vanguard, Fidelity, Schwab and JPMorgan have all cut fees on existing products or added lowest-cost ones to their fund lineups, frequently pricing just below their competitors’ funds in a specific peer group.

“Fees are driven downward by investor demand for low-cost index products, which have seen fees compressed to at or near zero,” Brendan Powers, associate director at Cerulli, said in a statement.

Lower fees have resulted in decreased revenue, and Cerulli warns that non-overt revenue compression will also exist. “Distributor platform consolidation, product rationalization and greater advisor use of asset allocation models mean that a higher percentage of assets and flows will move through a smaller number of products,” Powers said.

Cerulli says fee compression still has legs. Index funds manufacturers view cost as a competitive edge and increasingly use fees as a marketing tool. Powers noted that as ETF issuers contend with one another to offer the lowest fees, they are starting to file  for and are now rolling out zero- or negative-fee ETFs.

Greater use of institutionally priced share classes in the retail client channels will likely also continue to be a factor in driving net expense ratios lower, according to the report.

A recent Cerulli survey found that two-thirds of advisors intended to use lower-cost share classes, which Cerulli said was expected to increase adoption of platform share classes and institutional share classes.

But Powers noted that adoption of those that exclude sub-transfer agent fees has been very limited. “Therefore, sub-TA fees remain a sticking point for distribution platforms that need to be reimbursed for cost incurred related to accounting and infrastructure to maintain them,” he said.

According to the report, use of low-cost products and share classes excluding 12b-1 and/or sub-TA fees will change client-facing fees and the flow of revenue sharing between asset managers and distributors.

The report cited several examples of these changes. One is charging the client a platform fee that can be reimbursed through some form of revenue sharing. The other, charging an infrastructure fee to asset managers that participate on a distributor’s platform.

Powers emphasized that all new arrangements should have transparency as a top priority.

— Check out BlackRock Is Winning at Making Less Money From Clients on ThinkAdvisor.