Mutual Fund Management Industry Trends

More Financial Services Firms Offer Planning

Rapid Industry Growth

The relaxation of regulations that separated brokerage, insurance, and banking has led to the creation of large financial services companies like Citicorp, Bank of America, AXA, and American Express that offer a large range of investment products. Such companies offer financial planning services to individuals in the hope of capturing all of the customer's financial business.

Although industry growth in the short run depends heavily on the performance of the stock market and interest rates, long-term growth has been high. The net assets of the industry almost tripled in the last 10 years to more than $10 trillion. The number of funds has been steady in recent years, at around 8,000.

Moving from Commissions to Fees

Global Trading Complicates Fund Valuation

According to FPtransitions, financial planning firms have three business models: fee-based (56 percent); fee-only (8 percent); and commission-based (36 percent). More financial planners are changing their compensation models from commissions to fees. Advisors benefit from fee-based models as steady revenue is generated even if they're out of the office, and reduces the roller-coaster ride commissions generally create. Compared to flat fees or commissions that can easily cost hundreds, the hourly fee model (even though some advisors charge upward of $100 an hour) could save clients money.

The valuation of fund shares has become more difficult as portfolio securities are traded on international markets. For convenience, fund shares have historically been valued once a day, with each security owned by a fund valued at its closing price. As more securities are traded on several exchanges, there is no closing price. To price their shares accurately, funds will be forced to a system of live valuation.

Investment Management

Lower Fees

Financial planning is increasingly being equated with investment management. More financial planners are managing investments in addition to just practicing financial planning, according to Financial Planning Association. In the bull market of the 90s, planners had difficulty distinguishing themselves from advisors, because clients wanted to discuss primarily how well their investments were doing and what new investments they should consider.

The annual fees managers of mutual funds collect have steadily declined, from an average of about 2 percent of fund assets in 1990 to less than 1 percent in recent years. Greater automation has allowed managers to cut fees, as has the growth in the average size of funds and the growth of index funds, which need no active investment advice. Annual fees for some large stock index funds are less than a quarter of 1 percent.

Multidisciplinary Practices

More International Investments

The multidisciplinary practice (MDP), a firm with several types of professionals working in-house (CFP, CPA, CLU, CFA, JD, etc.), is a slowly emerging trend in the financial advisory business. Americans are increasingly looking for one-stop shopping in financial services. According to the Journal of Financial Planning, the MDP process is still in its early stages.

US mutual funds now hold a higher proportion of their assets in foreign securities. The development of foreign securities markets and listing of more foreign companies on US markets have made ownership of foreign securities easier and cheaper. Foreign stocks now make up more than 20 percent of stock fund assets, versus about 15 percent 10 years ago.

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